Independent counsel James C. McKay is investigating actions by Attorney General Edwin Meese III involving regulation of the telephone industry to determine whether Meese violated federal conflict-of-interest laws.

Meese and his wife, Ursula, owned 91 shares of stock in the seven regional telephone companies when he became attorney general in February 1985, and they retained legal title to it until last August when they sold it for about $14,000.

In mid-1986, Meese approved a reversal of Justice Department policy, endorsing legislation that would have ended federal courts' authority to regulate the seven "Baby Bell" companies created by the court-ordered breakup of "Ma Bell," the American Telephone & Telegraph Co.

Several former Reagan administration officials, then working on behalf of the regional companies, backed the reversal. They included former national security adviser William P. Clark who, as a board member of Pacific Telesis, one of the regional companies, twice wrote Meese to support the change. Also on the board was William French Smith, Meese's predecessor as attorney general.

The conflict-of-interest law prohibits a government official from taking part "personally and substantially" in any matter in which, to his knowledge, he, his spouse or any partner has "a financial interest."

Meese is under investigation by two independent counsels. Lawrence E. Walsh is probing Meese's role in the Iran-contra scandal, and McKay also is investigating his activities on behalf of Wedtech Corp., a bankrupt defense contractor. Several close associates of Meese have been indicted in connection with Wedtech, but Meese has not.

Justice Department officials are sharply divided about the likelihood that Meese will be indicted for actions involving telephone industry regulation, sources said.

Once McKay and his prosecutors "have all the relevant information, I think it will be clear he has not done anything in violation . . . ," said James Rocap, one of Meese's lawyers. "In fact, he took steps to make sure there was no violation."

One senior Justice Department official said that, while he does not think that Meese will be prosecuted, "if there is a straw that breaks the camel's back" in the investigations, "this is it . . . . There are some very tough questions involved here."

Just before becoming attorney general, Meese said he and his wife would sell all of their "Baby Bell" stock and other holdings. In his original financial-disclosure statement for 1985, and again for 1986, Meese listed the Bell holdings as sold May 23, 1985.

"I am accordingly no longer disqualified from participating in any matter involving those entities," Meese told ranking Justice Department personnel May 24, 1985, in an internal memo enunciating his "recusal policy."

Last January, however, Meese obtained a waiver from the White House allowing him to participate in Justice Department discussions on possible modification of the federal-court consent decree for the telephone industry.

Meese privately informed then-White House counselor Peter J. Wallison that Meese and his wife still had legal title to the "Baby Bell" stock, but only because they had been unable to locate the certificates in May 1985 when they transferred interest in them to a "new owner."

Wallison granted the waiver, finding that the stock holdings were too small to pose a conflict. "I do not believe that the interests . . . are likely either to influence you in your discussions related to the consent decree involving the telephone industry or to cause the public to question your integrity on this issue," he said.

The "new owner," it was disclosed last July, was San Francisco money manager W. Franklyn Chinn, a consultant and later board member of the now-bankrupt Wedtech Corp.

Meese had hired Chinn in May 1985 to sell his stock and invest the proceeds in a "limited blind partnership" with Financial Management International Inc., a company wholly owned by Chinn.

Chinn was indicted in New York last month with Meese's close friend, San Francisco lawyer E. Bob Wallach, and another man on racketeering charges alleging that they took payoffs from Wedtech in order to influence Meese and other federal officials.

In obtaining the waiver, Meese told Wallison that he had "no financial interest in . . . the new owner . . . . " Rocap defended that statement as accurate, saying the new owner of the stock was Chinn, not Financial Management Inc.

Meese "had no financial interest with Frank Chinn," Rocap said. "He got a partnership with Financial Management Inc. . . . . That's why we have corporations."

Rocap also said Meese's decision to seek the waiver did not reflect belated recognition that his participation in Justice Department decisions affecting regional phone companies would pose a conflict.

"He did it out of an abundance of caution," Rocap said. "He said, 'I don't want to have any suggestion of impropriety at all.' "

Rocap said Meese obtained a similar waiver in 1982, when he was White House counselor, so he could participate in talks about restructuring the telephone industry even though he held AT&T stock. That stock later became the Meeses' "Baby Bell" holdings as a result of the court-ordered breakup of AT&T in 1984.

With the waiver from Wallison, Meese participated in a controversial Justice Department proposal last Feb. 2, asking U.S. District Court Judge Harold H. Greene to lift restrictions prohibiting the seven regional companies from offering long-distance service, manufacturing telephone equipment and providing computer services.

Greene upheld most of the restrictions in a ruling criticizing the Justice Department for reversing its position and saying the department's legal analysis was "riddled with serious flaws."

Officials aware of McKay's inquiry said he is concentrating on what Meese did before the waiver. Wallison's ruling, one said, "may be too late in the game."

The legislation that Meese and the department supported in 1986 would have transferred supervision of the regional companies from Greene to the Federal Communications Commission.

The department, which brought the antitrust case resulting in the AT&T breakup, long supported continued court control and had rejected some new ventures proposed by the regionals. A Meese spokesman said at the time that Meese approved the policy reversal but did not initiate it.

Meese did not disclose details of his partnership with Chinn until last July after both were being investigated by McKay in connection with the Wedtech scandal and their financial dealings with each other.

Meese dissolved the partnership then and had Chinn transfer title to the "Baby Bell" stock and accrued dividend checks back to him. The Meeses then obtained replacement certificates, their lawyers said, and sold the stock last August.

Since then, Justice Department ethics officers have obtained memos and other documents relating to Meese's participation in telephone industry matters in order to perform a "conflicts analysis." That has been postponed at McKay's request, and the documents have been furnished to him.

One expert in ethics law said that the conflict-of-interest law at issue here applies to even small holdings. For the Meeses, the "Baby Bell" stocks amounted to about a fourth of the securities they held in 1985.

Rocap said Meese simply did not believe he had "a financial interest" in the phone companies at any time since May 1985 when he transferred ownership to Chinn. Under the law, Rocap said, "they {McKay and his investigators} have to show he knew he had a financial interest and he didn't."