The Environmental Protection Agency and the Army Corps of Engineers are butting heads over a proposed shopping mall in southeastern Massachusetts, and the conflict could affect the way wetlands development is regulated.

The case has sparked additional attention because Corps officials in Washington overruled their local counterparts, who had opposed the development.

Under the Clean Water Act, the EPA and the Corps share responsibility for guarding the nation's wildlife-rich wetlands, which are believed to be disappearing at a rate of 500,000 acres a year. Any project that involves the dredging and filling of wetlands requires a permit from the Corps. But the EPA can veto that decision if it determines that the project does not comply with federal guidelines.

In May, Col. Carl B. Sciple, commander of the New England office of the Corps, turned down an application by Pyramid Companies of Boston to build the "Newport Avenue Galleria," a $40 million shopping center, on Sweeden's Swamp, a wetland tract alongside Interstate 95 near Attleboro, Mass. The mall would have 150 stores and 700,000 square feet of leasable space.

Sciple said that building the mall would result in the "irretrievable loss" of 32 acres of valuable wetlands when an alternative site -- albeit one owned by another developer -- was available three miles away on dry land.

The regional offices of the EPA and the Interior Department's Fish and Wildlife Service agreed, saying the mall would have "an unacceptable, adverse impact on the wetland."

Swamps and wetlands are considered prime breeding grounds for waterfowl and fish, and they can improve and help maintain water quality.

But a month later, Maj. Gen. John F. Wall, director of civil works for the Corps in Washington, overruled the local Corps official and issued the permit on condition that the company "mitigate" the wetland loss by creating an artificial swamp nearby.

The reversal was unusual. At a congressional hearing earlier this summer, Republican Sen. John H. Chafee of neighboring Rhode Island asked Robert K. Dawson, assistant secretary of the Army for civil works, if it was common for headquarters officials to review the decisions of regional Corps officials. "No sir," Dawson replied, "it is not common."

Soon, the environmental community was buzzing: did the Corps' decision signal a dangerous precedent, giving developers a green light to build on wetlands as long as they created new ones nearby?

"This decision shifts everything in completely the wrong direction," said Dr. Robert P. Davison, a wildlife scientist for the National Wildlife Federation. "We ought to be making it progressively more difficult to build on wetlands, not easier."

Two weeks ago, Michael R. Deland, EPA's regional administrator, began a review of the Attleboro project that may ultimately block the development.

"If the Corps' decision prevails," Deland said, "the rules of the game will change. Instead of having the developer . . . move to another site, you'll have the developer moving the wetland."

Deland contends that the potential adverse impact of the mall is unacceptable because it could easily be avoided by building on the alternative site.

Public hearings are set for Sept. 26. The final decision rests with Deland, who has the authority to veto the project.

But Pyramid Cos. has called on him and his staff to disqualify themselves from the review, saying that they have prejudged the case.

Late last month, Pyramid filed suit in U.S. District Court here seeking an injunction to block Deland from continuing his review. No matter what Deland decides -- or whether he is allowed to render his decision -- the battle might well end up in the courts.

Corps officials here stand by their decision to issue the permit and deny that the move might set a dangerous precedent.

"This is not a message to developers to take the most valuable wetlands and fill them," said David B. Barrows, chief of the technical section of the Corps' regulatory branch.

"It may or may not have direct application to another case," he said.

According to Barrows, the Corps serves as a "referee" of the nation's waterways and aims to balance each individual project's anticipated benefits against its expected costs.

In the Attleboro case, Barrows said, Pyramid's creation of artificial wetlands would actually have a "net benefit" on the aquatic environment because the present wetland is of "very low value" and because no other available alternative would have less adverse impact.

Pyramid has offered to postpone construction of the mall until the artificial wetland is in place and functioning.

But many environmentalists doubt whether an artificial wetland will work.

"Even if mitigation is successful here, they wouldn't be creating the same type of habitat they would be taking away," said Douglas A. Thompson, an EPA biologist.

Others bluntly charge that the Corps is not fulfilling its mandate to regulate the use of the nation's wetlands. Whose benefit is being served by granting dredge and fill permits, they ask: the developer's or the public's?

"We see a growing pattern where the Army is consistently avoiding its regulation activities wherever possible," said Davison of the wildlife federation. "It feels there should be as little interference as possible into what people do with their private property."