The regional forester said don't do it. The cities of Seattle and Tacoma said don't do it. And so residents of Washington's two major cities were dumbfounded last week when they heard that that the Interior Department had done it--issued five leases for oil and gas exploration in the middle of their watersheds.

"We were in a state of disbelief," said Bill Stafford, an aide to Seattle Mayor Charles Royer. "I walked in and told the mayor: 'Mayor, they've awarded leases in our watershed!' Needless to say, he was shocked."

So was the Washington congressional delegation and local citizens. "As dumb a thing as I've seen!" raged Sen. Slade Gorton, a Republican. Democratic Sen. Henry M. Jackson and Rep. Norman D.Dicks, a Tacoma Democrat, called for the leases to be revoked. "A Shocking Decision," editorialized The Seattle Times. "I called Bob Burford Interior's chief of land management and raised hell," Sen. Gorton said.

Apparently chagrined by the uproar, Interior hastily suspended the leases this week "until we have a chance to see if the laws were complied with," a spokesman said. Burford's aides stressed that the decision was made by a middle-level bureaucrat in the Oregon-Washington regional office, without knowledge of officials in Washington. The chief of the regional office did not return phone calls yesterday.

Although Interior officials play down the incident, the watershed leases have fed an already-stormy controversy in Washington over Interior Secretary James G. Watt's aggressive land development policies. Earlier proposals for oil and gas drilling in the pristine Alpine Lakes region--an area known in Seattle as "the border between heaven and earth"--drew heavy opposition and prompted the House Interior Committee to schedule field hearings in Seattle later this month on Watt's wilderness policies.

Local officials blamed the watershed decision on Watt's recent order to clear the backlog of oil and gas lease applications on public lands. "It all comes down from Watt. It's damn the environmental considerations, full speed ahead," said Dicks, a frequent critic of Watt who sits on the House Appropriations Committee.

The regional office of the U.S. Forest Service last August recommended against granting the leases, since the sites--both national forests--lie within the watersheds of the Cedar River, which provides drinking water to 1.5 million Seattle area residents, and the Green River, which supplies 500,000 people in the Tacoma area. But Interior had final authority to rule on oil and gas leases in national forests, and awarded them from the Portland office.

Interior apparently did not complete a formal environmental assessment before issuing the leases late last month. The Forest Service was still studying potential impacts on the watersheds, according to the regional forester.

An Interior spokesman defended the department's decision. In Seattle, the site is already being logged by timber interests, a spokesman said, "so our guy didn't see what the problem was with oil and gas." He said it is not clear whether Interior was required to perform a formal environmental study before issuing the exploration leases. An energy company that obtains an exploration lease must still apply for a permit to drill for oil and gas, the spokesman said.

Interior officials said they may lift their suspension if they find that all legal requirements were met. But local officials predicted the department will use the suspension as a face-saving way to back away from the leases.

"Whatever happened to Interior's good neighbor policy and the sagebrush thing about paying attention to local governments?" said Stafford, the Seattle mayor's aide. "This sounds like the 'New Federalism' in reverse."