The Labor Department yesterday lifted its 42-year-old ban on home labor in the knitted outerwear industry, an action applauded for expanding job opportunities but criticized for creating the potential for sweatshop-style abuses and illegal labor practices.

"We think this new regulation will provide maximum flexibility to employers and to employes and give us a way to easily enforce the Fair Labor Standards Act," said Susan R. Meisinger, deputy undersecretary for employment standards. " . . . I do not think we are opening the way for exploitation."

Critics of the move, chiefly labor unions and major knitwear companies, have argued that the government's ban on home labor should remain in force because homework is too difficult to police and allows employers to violate the laws on minimum wages and child labor, among others.

"Secretary Raymond J. Donovan and his assistants will say that protections are built in through their new permit system, but history has shown that to be nonsense," said Herman Starobin, research director of the International Ladies' Garment Workers Union. "The department can not enforce the new rule and that is the whole history of homework. It was outlawed because rules could never be enforced."

The new rule, which survived three years of legal challenges, lifts a ban that has prohibited manufacturers of outerwear such as knitted hats and sweaters from employing home workers, except for handicapped people or those who took care of handicapped people. Under the 1942 Fair Labor Standards Act, the labor secretary was authorized to impose bans on homework to safeguard minimum wage and other standards that were being violated during World War II.

Homework bans remain in effect in six other industries that have histories of abuse: women's apparel, jewelry manufacturing, button- and buckle-making, handkerchief manufacturing, gloves and mittens, and embroidery.

Unions are concerned that Donovan may renew his 1981 effort to lift the homework bans in those industries, and the AFL-CIO is also seeking to extend the prohibition to the growing and unregulated home-computer field, in which thousands of clerical workers work at home, entering data into terminals.

Meisinger said the department has "nothing on the regulatory agenda currently" to lift other bans or impose new ones. However, Sen. Orrin G. Hatch (R-Utah), chairman of the Senate Labor and Human Resources Committee, has strongly endorsed lifting all bans on homework.

Controversy over homework flared in 1979 when department inspectors cited several Vermont companies for hiring home workers. The action drew protests from small firms and some of their workers, including women who were earning above the minimum wage through a piece-rate pay system and who said they were being deprived of a livelihood.

"I knit in my home because I enjoy my job, and for very practical reasons: I can make my own working hours, work at my own speed and most of all I am home when my family needs me," Nancy Smith of Waterbury, Vt., testified at a 1981 congressional hearing.

Starting yesterday, employers in knitted outerwear, with an estimated 63,000 workers mostly in Vermont and Maine, will be able to employ home workers legally by obtaining a certificate. The company will be required to list only its name, address, and principal place of business to be certified.

"The employer is self-identifying with the full knowledge we will be coming in to investigate" whether minimum wages and adequate working conditons are maintained, Meisinger said. The department said it has dramatically increased the number of home work inspections, but critics note that the 1,000-member compliance staff has been cut by more than 10 percent under the Reagan administration. Congress has authorized an additional 50 inspectors next year.

Legislators from Maine, Vermont and several other states have endorsed lifting the ban. But critics such as Rep. George Miller (D-Calif.), who delivered a petition from 140 House members opposing the department's move, said Donovan was "reversing 40 years of labor history."

Miller said homework abuses are rampant in California's garment industry and said legalization will "undermine legitimate manufacturers and cheat the government" of employment-related tax payments, particularly because so many companies employ illegal aliens.

Meisinger, however, said department officials believe that enforcement will increase, because workers will feel freer to complain about violations since their work is no longer illegal.