A massive mudslide on a hillside shantytown outside the industrial city of Ponce appears to have buried alive more than 200 people and possibly as many as 500, local officials said today.

Gov. Rafael Hernandez Colon met with his cabinet here tonight and dispatched health workers to assess the danger of an epidemic.

If such a danger exists, officials said, they must face the possibility of leaving the bodies unrecovered.

The soil then would be compacted from the top of the hillside.

"It would be a symbolic mass burial," said Col. Luis Manuel Carillo.

"I understand its an emotional issue because relatives want to retrieve the bodies of their loved ones."

A three-day storm caused widespread flooding all over the island and claimed the lives of at least 84 people, including 50 recovered at the mudslide at Mameyes near Ponce.

Officials called it the island's worst disaster of the century.

The mudslide, which occurred early Monday, crushed 275 homes, submerging them under tons of dirt.

About 50 bodies have been pulled out so far, according to rescue workers, who covered their faces with surgical masks to stave off the stench.

Since heavy equipment was useless on the unstable slope, National Guardsmen and civil defense workers struggled with chainsaws, picks, ropes and their bare hands to unearth more victims. But as the sun baked the earth into a hard crust over the buried homes, little hope was held out for new survivors.

Unlike the rubble that covered victims of Mexico's earthquake, the mudslide left no air pockets, rescuers said.

Fewer than a dozen bodies were recovered today, because of the difficulty of the rescue operations.

Officials said the rescue work, if continued under such painstaking conditions, could take months.

Meanwhile, weather forecasters predicted more rain in the next few days, which could make the task more difficult.

Hernandez Colon asked President Reagan to declare the island a disaster area.

"We are still going through the unhappy process of counting the number of lives lost, as well as the economic impact this catastrophe has had on Puerto Rico," Hernandez Colon said in his appeal.

Nine experts from the U.S. Army Corps of Engineers, accompanied by trained dogs and special sensing devices, flew into Ponce today to assist Puerto Rican authorities in rescue efforts.

In an emotional funeral service today at the Ponce coliseum for 23 of the dead, Hernandez Colon, his voice breaking with sorrow, took the microphone to ask: "Why do these things happen? . . . Each must find his own answer. The Lord giveth, and the Lord taketh away."

The governor tried to console Maria Oquendo, the godmother of a 9-month-old baby who was the only survivor of a family of five.

"The baby was in a play pen. We grabbed him by the arm and managed to save him," Oquendo sobbed.

More than 5,000 people attended the mass service.

Then, as the 23 caskets were driven slowly toward the El Yeso cemetery, onlookers pelted the passing hearses with flowers.

At the funeral service, the governor and other speakers called for more low-income housing so that illegal squatters such as the families who were buried under the mudslide would not be forced to settle in unsafe areas.

An official from the Federal Center for Disease Control in Atlanta reportedly was en route to Ponce tonight to help assess the possibility of disease spreading from the rotting bodies.

In addition to humans, pigs, goats, chickens and rats also are decomposing under the soil, adding to the danger.

Officials said that pools of water have been contaminated at the Ponce site, causing authorities to fear that unsafe water might seep into the city's underground wells.

In 1899, Hurricane San Ciriaco killed 3,369 people on this island.

The worst mudslide in U.S. history to date occurred in 1972, when a total of 125 people were killed in the collapse of a dam in West Virginia.

The island, a U.S. commonwealth, has a population of 3.2 million.

The American Red Cross operation headquarters in Alexandria, Va., dispatched a 15-member team to the site.

A Red Cross spokesman said to donations to aid victims of the disaster could be sent to:

The American Red Cross, Puerto Rico Relief Fund, P.O. Box 37243, Washington, D.C. 20013.