On a rolling hill once graced by a peach orchard, Kathy and John Varady built a two-story colonial home eight years ago, having sacrificed the small comforts of life to save for a down payment.

But their house, it turns out, is contaminated by radon -- a colorless, odorless, radioactive gas that seeps through uranium deposits buried below their subdivision. Radon causes lung cancer.

In the Varadys' house, where they are rearing four children, radon levels have reached the cancer-inducing equivalent of smoking 21 packs of cigarettes a day, or getting 70,000 X-rays a year. Their home is so radioactive that if it were a uranium mine, the government would shut it down.

"I can't sleep," said Kathy Varady, red-eyed as her tousled 4-year-old, Megan, frolicked around the kitchen table. "Talk about guilt trips. We didn't intend to put our children here. But the fact is, the home we're providing them is killing them."

The Varadys' house is among 22,000 residences in Pennsylvania and more than 300,000 in New Jersey and New York that sit on a geological formation of uranium and porous granite known as the Reading Prong.

Since last December, when the problem was discovered in Boyertown, Pennsylvania officials have tested 3,700 homes and found 40 percent contaminated with radon levels that exceed the government safety standard for uranium mines.

The radon problem was thought to be confined to small areas in the West -- homes in Grand Junction, Colo., and Butte, Mont., were found to be contaminated. But radon has emerged recently as a more widespread health threat, according to state and federal officials.

The Environmental Protection Agency estimates that 5,000 to 20,000 Americans die of lung cancer because of radon each year. Only smoking causes more cases of the disease. About 120,000 people die of lung cancer each year in the United States.

"There is unanimous agreement in the scientific community that the cancer risk from radon far exceeds that from all of the other widely publicized radiation threats in our society combined," University of Pittsburgh professor Bernard L. Cohen told a congressional hearing in October.

Originally, officials thought radon seepage into homes could be easily controlled by caulking basement cracks and installing ventilation systems. But methods applied in Boyertown and other areas, by the EPA and private firms, have yielded uneven results.

"This is going to be one of the major national issues in the years ahead," said Sen. Frank R. Lautenberg (D-N.J.), chief sponsor of a bill requiring the EPA to make a national survey of the problem and research new methods of dealing with it.

The recently passed 1986 appropriations bill for EPA includes $1.5 million for radon research. EPA has asked the Office of Management and Budget for $10.8 million over the next five years to look into the problem.

Radon has become an issue in more than 30 states. In Florida, where homes have been built on radon-contaminated phosphate wastes, recently passed legislation requires radon inspection of new homes. After 200 private wells were found to have highly radioactive water, Maine began offering free radon tests to homeowners.

In the Northwest, the Bonneville Power Administration has handed out 10,000 radon monitors in Washington, Oregon, Idaho and Montana in an effort to pinpoint hazardous regions so development can be restricted. EPA estimates that more than 1 million homes could have levels above the safety standards for uranium mines. H. Ward Alter, head of Terradex, a Walnut Creek, Calif., company that manufactures radon monitors, puts the potential at 8 million homes.

Five years ago, a study of 60 Maryland homes near the District found high radon concentrations, according to a spokesman for Rockville-based Geomet Technologies Inc. Further study is needed, the spokesman said.

Virginia has significant uranium deposits in Pittsylvania County in the southwest of the state, but no radon studies have been made.

The highest radon levels have been found along the Reading Prong, which extends from northwestern Pennsylvania across the suburbs of northern New Jersey into southern New York state.

"These homes are cancer bombs waiting to go off," wrote Robert E. Yuhnke, regional counsel of the Environmental Defense Fund, in a letter to Pennsylvania officials. "They must be defused as soon as possible."

Pennsylvania is giving out free radon monitors. In October, Gov. Richard L. Thornburg (R) announced a $3 million low-interest loan program for homeowners in four counties. But families such as the Varadys say the program will not work until the government finds out what construction techniques can prevent seepage of the deadly gas.

"People are pretty scared," said Gerald Nicholls, chief of New Jersey's radiation protection bureau. "They look at us at meetings and say, 'Will I start to glow?' "

New Jersey, where officials expect that as many as 80,000 homes could have unsafe radon levels, enacted legislation recently providing $3.2 million for a survey of homes along the Prong and an epidemiological study to attempt to correlate cancer deaths and radon locations.

The state already has been grappling with a radon problem of its own making. When 12 houses in Montclair and Glen Ridge, built on soil contaminated by a radium-processing plant that made luminescent watch dials, were found to have unsafe radon levels, New Jersey officials ordered the removal of 14,000 drums of contaminated dirt from beneath them.

But a Nevada disposal site refused to accept the dirt. An amendment to federal "Superfund" legislation, headed for a House-Senate conference, would allocate $7.5 million to move the dirt to a temporary storage site.

The radon problem along the Reading Prong was discovered by fluke. Last December, Stanley Watras, a construction engineer, tripped radiation monitors on his way into the Pottstown nuclear power plant where he worked. The monitors are set up to measure contamination for employes leaving the plant.

Philadelphia Electric Co. officials and state technicians tested Watras' house in Boyertown, in the same subdivision as the Varady home, and found radon levels 675 times higher than federal safety guidelines. State officials said it was the highest measurement ever found in a private home in the United States: the equivalent of smoking up to 220 packs of cigarettes a day or having 455,000 chest X-rays a year.

"I went totally crazy," Watras said in an interview. "We were living in a radioactive cloud . . . . I said I have two little babies. It was the first time my co-workers had seen a 250-pound man cry in front of them."

Watras, his wife, Diane, and their two sons had lived in the house a year. Exposure to such radon levels increased their risk of lung cancer 13 percent a year, experts told them. Over a lifetime, the risk would have been 585 percent higher.

Under orders from the state Department of Energy Resources, the Watrases evacuated immediately. For six months, they lived in a motel and a rented apartment while a contractor, paid by Philadelphia Electric, installed $32,670 worth of ventilation systems, a new basement floor and other improvements.

Radon levels plunged, and in July, the family moved back into their house. But by August, the levels had climbed to 25 times EPA's safety guideline. A new exhaust fan was installed and levels dropped again. By November they had risen once again to 100 times the safe level.

"Nobody has any explanation why it's going up," Watras said. "Now we're looking at vent stacks, and giving the fans more suction. If this doesn't work, the experts are shrugging their shoulders."

EPA is testing methods on 19 houses in the Boyertown area and plans to expand the research program to 110 homes next year. Radon levels have dropped significantly in some of the 19 houses. In others, such as the Varadys', the levels go up and down.

Kathy Varady, whose husband makes about $30,000 a year as a circulation manager for a small newspaper, said they have thought of selling their house, "but how can you walk away from everything you've got? We thought for sure EPA would have a solution by now."

If they moved out, she said, they could not afford rent on a new house plus the house mortgage. The bank would foreclose.

"We could probably sell the house, but I don't think I could live with myself, especially if it were to a young family," she said.