The Nuclear Fuel Services Inc. plant here was a national first, the launching of an industry to reprocess used-up nuclear power plant fuel into new atomic material.

It didn't work. It was a political, financial and regulatory failure and has been closed for the past six years.

But the peeling building, a tan-and-aqua factory nestled jarringly between dairy farms and this postcard New England town, is about to be a national first again: the pilot project to solidify and make movable some 600,000 gallons of radioactive liquid waste.

Much is at stake for the nuclear industry in this project, which is intended to be the first step in dealing with the growing piles and tanks full of radioactive waste from nuclear power plants and the defense industry.

The boiling hot, churning liquid sludge in underground tanks here was once many tons of spent fuel rods, just like those piling up in pools of water at all 73 of the nation's nuclear power plants. There were 6,878 metric tons of those rods as 1980 ended, and they, too, are destined to be liquefied in acid someday, so their remaining atomic material can be recovered. What's left then will be sludge like the sludge at West Valley, which has been waiting nine years for some decision on what should be done with it.

The defense industry, which has its own reactors, reprocessors and bomb-making factories, is watching over 25 times as much liquid waste: 77 million gallons, increasing at the rate of 1.5 million gallons per year. Leaking tanks in Savannah River, S.C., and Hanford, Wash., must be emptied soon. West Valley may also demonstrate the future for those wastes.

Owned by the state and formally called the Western New York Nuclear Service Center, West Valley and its deadly liquids are unfailingly remembered in all antinuclear literature. They are cited as nagging evidence that nuclear waste has never been dealt with, that hardly anybody wants to face its political and financial fallout.

The industry has always contended that waste was only a political problem, that all the technical issues have been solved. The West Valley project could help prove that the sludge can be reduced in volume, made easier to handle and kept chemically stable.

Legislation is pending in Congress that would lead to siting a permanent central dump for all the nation's high-level radioactive waste. West Valley would help decide what goes into it.

Under 1980 legislation pushed by most of the New York congressional delegation, the Department of Energy plans to drain the sludge from the huge underground tanks, although they were never designed to be drained. There is some concern about getting all of it out.

The waste will be treated with chemicals and precipitants, probably inside a rejuvenated Nuclear Fuel Services building. What's left will be converted into some kind of solid: glass, cement, a "fused salt," or a brown calcite that looks like instant coffee.

The choice of what to convert it into will be made in 1984. As a solid, there will be less volume to deal with, although it will be far more radioactive per ounce.

Remodeling the NFS building to house the solidification process will take until 1990. By the time the tanks are dry, it is hoped, some kind of central repository should be available to store West Valley's waste, and the waste from the rest of the country, for thousands of years.

When the waste leaves West Valley, there will be another national first here: the whole radioactive place will be "decommissioned" and decontaminated, the tanks filled with cement, to show the world that such a thing is possible.

DOE's draft environmental impact statement includes the alternative choices of doing nothing, or solidifying the wastes within the big tanks, but neither of those is likely to happen. Those methods would not deal with wastes elsewhere, and West Valley is clearly intended to set a precedent.

The issues now are predictable. A September hearing on DOE's proposal brought dozens of local people out to worry that the plant had once leaked radiation over the rolling green hills and might do so again. Six years of talk and promises have left them suspicious that the feds could ever do anything right.

Emile Zimmerman, a local dairy farmer, asked for reassurance that he would be reimbursed if anything happened to his cows. He blamed past stillbirths and spontaneous abortions among the cattle on radiation releases, although no link has ever been scientifically established.

Deborah Simpson of Olean, 35 miles away, wanted promises that people would be told if anything goes wrong. "The government needs this project to work well," she said. "It's a propaganda piece in a sense. But the past history here has not been good. How do we know you will level with us?"

Radiation once leaked into Cattaraugus Creek behind the plant and workers said they were contaminated a few times in the building. Low-level irradiated rags, clothing and other wastes, some of it from local hospitals, were buried on the plant grounds until 1975. Antinuclear groups in the area charged at the hearing that small radiation amounts had leached into the groundwater.

There were highly technical questions about radiation levels for workers, risk assessment methods and dose measurement techniques used in DOE's draft environmental impact statement. Some people worried that the tranquil valley would wind up accepting and solidifying all the liquid waste in the country.

Their words echoing off the concrete and hardwood of the local high school gym, DOE officials tried to be reassuring. DOE's nuclear waste policy chief, Sheldon Myers, said candidly that he wasn't sure exactly how much the project would cost, how long it would last or just when some crucial decisions would be made.

Yearly maintenance now costs $3 million, and Westinghouse Corp. has a $140 million contract to run the DOE project through 1986. DOE last year estimated total costs, including decommissioning, at $285 million.

What he was sure of, Myers said, was that DOE finally means business.

"We are not here to bring waste in from out-of-state. We are here to clean up West Valley," he said. A final environmental impact statement will be issued next year and work will begin shortly thereafter.

At the plant, visitors tend to talk in low voices while peering into the 100-foot-long tank of water, glowing blue-green, that holds the last spent fuel rods shipped here before the place shut down in 1975. Touched with white "barnacles" of corrosion, these 163 tons of oblong bundles never went through the chopping arms and into the nitric acid bath that freed the useful uranium and plutonium for recovery.

When the plant was running, from 1966 to 1972, 640 metric tons of spent fuel from nine utilities and defense reactors made that trip. Nuclear Fuel Services workers stood behind five-foot-thick chartreuse windows of leaded glass to handle it, peering into sealed-off rooms and wielding "master-slave manipulator" arms that are now covered with plastic sheeting. Nobody has been in those massively radioactive rooms since 1966, but waste solidification processes could be performed there.

The reprocessing plant never made a profit. NFS plant manager James Duckworth said its capacity of one ton of spent fuel per day was too small to be economical. Davison Chemical Co. sold its operating contract with the state in 1969 to Getty Oil, which was going to try expanding the operation to three tons per day and stopped reprocessing in 1972 to get ready, Duckworth said.

But licensing approvals dragged on for four years, and then President Carter announced a ban on all re-processing plans. "It was just a total change in government philosophy," Duckworth said. President Reagan has reversed that policy, but has done little to launch a reprocessing industry except cheer it on. No commercial reprocessing plants now operate anywhere in the country.

Now three tons of chromium and stainless steel equipment bought for the doomed expansion are scrap, littering the yard out by the site of the two underground tanks.

To be solidified, the waste would have to be brought in from those tanks, one large and one small, that lie in a concrete tomb under eight feet of earth beneath a fenced-off square of lawn behind the building. The tanks, which cannot be visited, are marked only by several test pipes and a maintenance shed.

The big stainless steel tank, 70 feet across and 20 feet deep, sits like a cup in a saucer over a sort of concrete pan in which, unfortunately, there is a hole. "We think it got put there during construction," said Duckworth. The elaborate radiation detection system has never found a leak in the tank, but if there were one the liquids would flow into the surrounding earth.

Residents worried about possible earthquakes that could cause such a leak, and also worried about how long the tanks will last. Duckworth said they were built to last 50 years, but the radioactive liquids are hot and very corrosive.

The site, in short, has most of the problems of nuclear sites anywhere in the country, plus the ones involved with nuclear waste management.

James Turi, who will manage the site program for DOE, promised the people he will keep them informed. "We have nothing to hide. The project will be operated in a fishbowl and if if we wanted to cover up something there's no way we could," he said.