Every evening in Prior Lake, Minn., hundreds crowd into the Little Six Bingo Palace on the Shakopee Mdewakanton Sioux reservation, where they play for jackpot prizes ranging from $500 to $10,000.

Just outside the reservation, they would be breaking the law. Minnesota has a $100-per-game prize limit for bingo.

The Sioux and their customers may be pleased with this situation, but it has led to a feud between the Justice and Interior departments that may come to a head on Friday.

Sources in both departments say the Justice Department wants to end high-stakes gambling on reservations, in the belief that it will attract organized crime. The Interior Department says profits from the high-stakes games are a means for Indians to be self-sufficient.

The reservations, held in trust by the federal government, generally are not subject to state regulation. In states that allow bingo sponsors to offer prizes of up to $100, Indian reservations have offered tens of thousands of dollars in bingo prize money, with the blessing of at least two federal courts.

The result, for certain Indian reservations, has been high attendance and gross revenues of $100,000 to $1 million monthly, according to Interior Department estimates.

Currently, about 80 of the nation's 300 Indian tribes conduct gambling games, with about 25 percent of them offering prizes substantially higher than those permitted by state law, according to the Interior Department. The money has helped tribes that have suffered from unemployment, scarce resources and cutbacks in federal funding, according to Bureau of Indian Affairs spokesman Vince Lovett.

Interior Department officials have cited Reagan administration policy in support of their position, saying administration policy calls for Indians to "move toward self-determination" and "recognizes the tribes as governments," according to department spokesman Bob Walker.

Justice Department officials, meanwhile, say the large amounts of cash in high-stakes gambling operations acts as a "magnet" for people who want to launder money from drug transactions. In addition, Deputy Assistant Attorney General Mark M. Richard of the criminal division said, such high-stakes games require security guards, food services and cleaning services -- "fringe operations" that can attract "racketeers who preserve their competitive edge by violence and intimidation."

"This isn't church bingo we're talking about," Richard said. "We're not talking about $10 or $15 prizes. This isn't social hall bingo."

That doesn't bother the Interior Department. "This kind of revenue-producing possibility should be protected and enhanced," former assistant secretary for Indian affairs Ken Smith wrote in a department memorandum.

Two years ago, the Justice Department suggested a change in federal law that would have given states the authority to license, regulate or prohibit gambling on Indian reservations. But then-Secretary of the Interior James G. Watt argued against the proposal at a White House Cabinet meeting, saying it was contrary to the concept of Indian self-determination, according to Lovett. The proposal never reached Congress.

The disagreement between departments surfaced again last year when officials testified before the House Committee on Interior and Insular Affairs about a bill that generally would have allowed tribes continued exemption from state gambling regulations.

Richard told the committee that the Justice Department had "reservations" about the bill because "from a law enforcement perspective" it did not go far enough. Richard said outside authorities, not the tribes, should regulate gambling on Indian reservations. But Deputy Assistant Secretary of the Interior John W. Fritz expressed support for the bill, testifying that the tribes themselves should "put together some sort of regulatory mechanism."

In the end, the committee decided to postpone action on the legislation, which was reintroduced this year.

The squabbling generally has worked to the advantage of the Interior Department. The Indian reservations have been allowed to continue giving prizes that exceed the limits permitted by state regulations.

But that may change soon, according to Justice Department attorneys. The Justice Department may propose legislation that would subject the reservations to state regulation, they say.

In addition, U.S. attorneys around the country are expected to bring lawsuits against Indian reservations that offer forms of gambling not permitted by state law, according to the attorneys. While the reservations are not subject to state regulations limiting the amount of prize money in a given game, they are subject to state criminal law and cannot, for example, offer greyhound racing or casinos in states that permit only bingo, according to Richard.

If Justice and Interior department officials fail to resolve their differences after Friday's meeting, Attorney General Edwin Meese III intends to attempt to resolve it with Interior Secretary Donald Hodel, according to Justice Department attorneys. Neither Meese nor Hodel has publicly expressed an opinion on the issue.