Since April 8, when a federal appellate court struck down the Consumer Product Safety Commission's ban on insulation made with formaldehyde, the mood at the troubled agency has hit another low.

Explained one harried staff member: "Now we have two ongoing crises: reauthorization and UFFI urea-formaldehyde foam insulation ."

Commissioners are trying to decide how to respond to the decision by the U.S. 5th Circuit Court of Appeals, which said the CPSC had failed to produce the "substantial evidence necessary" to support a nationwide ban on the insulation.

"They didn't say our base of evidence was wrong; they just said it wasn't sufficient for a ban," said one high-level official, who described the ruling as a "real blow" to the agency.

The ban took effect Feb. 23, 1982, after the CPSC, on a 4-to-1 vote, decided that the insulation posed a significant health threat to consumers because formaldehyde had been shown to cause cancer in animals and had been linked to a variety of health problems in humans. These include nausea, headaches, dizziness and respiratory ailments.

But the appeals court ruled that "evidence is lacking here."

Commissioner Stuart M. Statler said last week that the decision hurt the agency psychologically, because the ban was the only such action by the commission in recent years. The decision, he said, "puts a damper on the regulatory fervor of the staff."

More significant, Statler said, is the potential harm that may come from the appellate court imposing its own standard for what constitutes evidence of a hazard. "It is placing itself in the position of being a finder of fact, which is precisely the role that Congress decided this agency would play," he said. "The court is substituting its judgment on technical matters for the judgment of this commission and that is very, very troublesome . . . not only for the CPSC but for any other regulatory agency."

Statler was the only commissioner to vote against banning the insulation, although he says he regards the insulation as a "lousy product."

As a result of the court's tough ruling, some commission members worry that they may have difficulty making even product standards stick.

Commissioners met last week, but so far haven't decided whether to ask the court for a rehearing or to appeal the ruling to the Supreme Court.

"We're in a real bind," said a commission official. "To get the Supreme Court to hear the case, you argue that it has far-reaching impact. But if the ruling stands, you have to say that it has limited impact."

In addition, the official said, the agency is wrestling with the problem of what to tell consumers who want to know whether the insulation is safe.

"We haven't decided what to say to them yet," the official said, "except that we lost and we are deciding on our options." TREAUTHORIZATION BATTLE . . . Congress is debating the agency's reauthorization and two very different bills are under consideration.

The House bill, which is still being marked up in subcommittee, would provide a $47 million budget for fiscal 1984, renew the agency for five years and facilitate the agency's ability to release information on consumer complaints about defective products.

The Senate version, though generally favorable, is less generous. It would provide the agency with a $35 million budget for next year, renew it for two years and continue the present restrictions on the agency's ability to release information on complaints. That bill has been sent to the Senate floor.

"In the House, things are going well," said an agency staff member. "But we must deal with a bare-bones Senate bill and that means a lot of compromises."