A pesticide that kills nary a pest is at the heart of the latest chemical controversy at the Environmental Protection Agency, and industry officials warn that the outcome could upset the nation's apple cart.

The EPA is expected to announce its preliminary decision this week on a potentially cancer-causing chemical called daminozide, marketed by the Uniroyal Co. under the trade name Alar. The effort stems from the agency's review of chemicals that were in use before the law governing pesticides was tightened in the early 1970s.

But in the case of Alar, the process has become a high-stakes showdown between public-health protection and an agricultural technology that has made it possible not only to produce larger, redder apples, but keep them on supermarket shelves long after the normal season has passed.

Although Alar is regulated by the EPA as a pesticide, it is a growth regulator and has been used by orchardists for more than two decades to make their apples larger and brighter in color. The chemical also keeps apples from dropping from the trees when ripe, avoiding the cracks and bruises that can make them unsuitable for the fresh market.

Perhaps more important, Alar makes apples firm enough to withstand months in storage. Without the chemical, growers say, they would have to market apples that have relatively poor "keeping" qualities, such as Red and Golden Delicious, soon after they are harvested, instead of stacking them in special warehouses for shipment throughout the year.

"If we lose Alar, we shorten our storage season," said Derl Derr of the International Apple Institute. "After springtime, there would be very few apples for fresh marketing."

EPA estimated the economic loss to apple growers at $31 million. The institute said that the chemical is worth as much as $100 million to apple growers and related industries, including wholesalers and shippers, and might cost export sales, as well.

The EPA, however, said it has evidence that Alar is a carcinogen, and the agency is even more concerned about what happens when apples containing residues of Alar are processed into such products as applesauce, juice and pie filling.

In the presence of heat or acidic conditions, Alar breaks down into a compound called UDMH (unsymmetrical dimethylhydrazine), a varient of hydrazine rocket fuel that may be a more powerful cancer-causing substance than Alar.

While the amount of Alar found in supermarket products is small -- averaging less than one part per million, according to industry figures -- the EPA estimates that it is enough to cause cancer in as many as one in 1,000 persons exposed to the chemical for a lifetime through an average diet.

Those risks are nearly as high as the risks attributed to ethylene dibromide (EDB), a grain and soil fumigant that the EPA banned for most uses two years ago when officials discovered it had become pervasive in the nation's food supply.

Last summer, the agency announced that it intended to ban Alar, as well. Less than a month later, however, an EPA advisory panel threw the proposal into a tailspin by deciding that laboratory studies of the chemical, while cause for concern, were inadequate to prove that Alar causes cancer.

Some tests of Alar dated back to 1977 and "none was completely definitive," said Ernest Hodgson, an entomology professor at North Carolina State University who headed the advisory panel. Studies on UDMH, conducted by the Air Force in 1984, were "better, but there were still problems," Hodgson said.

The advisory panel recommended that the EPA postpone action on Alar until at least 1988, when Uniroyal expects to have completed a new round of tests.

Uniroyal, the manufacturer of Alar, insists that the chemical is safe and contends that the EPA greatly overestimated public exposure to residues in food.

"Our position is that it is a chemical that is very important to the grower, and there are no studies to suggest it's a problem," said Renee Potosky, a Uniroyal spokeman.

Despite vigorous industry opposition and scientific dissension in the agency's ranks, EPA officials say they still believe that exposure to Alar and UDMH should be restricted.

The agency briefly considered restricting the chemical to fresh-market apples only, an idea that was abandoned when apple growers pointed out that it ignored the realities of fruit production. Few orchardists produce only for the process market; they typically send their largest and most perfect fruit to more lucrative fresh markets and ship undersized or blemished fruit to canneries or juice mills.

According to EPA officials, the agency also is considering reducing exposure by banning some "secondary" uses of Alar. Apple growers make up most of the market for the chemical, but it also is used on peanuts, Concord grapes, cherries, peaches, pears, plums and a few vegetable crops.

One agency official said the agency has estimated that a "significant portion" of human exposure to UDMH -- perhaps as high as 40 percent -- cames from processed versions of those products, including grape juice, jelly and some sweet wines.

Whether the agency has the power to ban Alar for those uses, given the opinion of its scientific panel, is another question.

"We do have indications that EPA will not pursue cancellation," Potosky said. Uniroyal has offered, instead, to conduct additional tests on food residues.

In that effort, the company is likely to get some help from the National Food Processors Association, whose 600 members include the nation's largest producers of canned fruit and juice products.

"We want to help the EPA find out how much daminozide is in the food supply," said association official Roger Coleman. "As long as daminozide is used for fresh fruit there will be some in the processed, as well."

The processed-food industry clearly is not eager to see a repeat of the EDB brouhaha, in which dozens of cake mixes and other popular consumer products were stripped from grocery shelves before television cameras in 1984.

According to EPA and industry officials, some processors have urged their fruit suppliers to avoid using Alar.