The Environmental Protection Agency yesterday gave poultry farmers the green light to use a controversial fly-control chemical, despite evidence the substance leaves a potentially cancer-causing residue in chicken meat and eggs.

In approving the chemical, called cyromazine and sold by Ciba-Geigy Corp. under the trade name Larvadex, the EPA said it was satisfied that the risk of cancer to humans is "nonexistent or, at worst, extremely low." This is the latest of several reversals the EPA has made on Larvadex, a pesticide mixed with feed to control flies in the birds' manure.

The action is likely to draw fire from health officials and consumer groups who regard the EPA's efforts to approve Larvadex as an assault on the Federal Food, Drug and Cosmetic Act's controversial Delaney clause. The clause forbids the use of any food additive shown to cause cancer in animals or man, and the EPA acknowledged in its official notice yesterday that Larvadex residues "clearly did induce cancer" in laboratory mice.

But the agency said it did not believe that minute residues in eggs and poultry meat posed any threat to man. The EPA routinely balances risks and benefits for agricultural pesticides. But critics have questioned the agency's authority to do the same for Larvadex, which falls into the category of food additive because it is fed to the animal and later shows up in edible tissues.

Although the chemical has never been registered for any use, it was being fed to chickens in more than 28 states two years ago under "emergency" EPA permits. In 1983, however, the agency pulled Larvadex off the market because of evidence that its residues caused bladder tumors in mice. A year later, the agency proposed to approve the chemical, saying the residue was an indirect cause of tumors. According to EPA officials, the residue caused bladder stones, which in turn induced tumors. But the agency put the registration back on hold less than a month later, after California health officials questioned the substance's ability to cause birth defects. The EPA said yesterday that it was satisfied with Ciba-Geigy's latest studies on birth defects. The EPA also set residue levels for Larvadex in eggs and chicken meat. Last year, the agency had proposed allowing as much as .4 parts per million (ppm) of Larvadex and its byproducts, but it said yesterday that those were "unnecessarily high." Instead, residues will be limited to .25 ppm in eggs and .05 ppm in poultry meat.

EPA officials said the approval is "conditional" until Ciba-Geigy indicates how much of the chemical workers will be exposed to when they mix it into chicken feed.