In a key test of state powers to regulate hazardous waste within their borders, the Environmental Protection Agency yesterday upheld the right of North Carolina to enact environmental laws tougher than federal requirements.

GSX Chemical Services Inc. had asked the EPA to revoke North Carolina's authority to run a hazardous waste program after the state legislature passed a law in 1987 setting discharge standards so stringent that they blocked GSX plans to operate a large regional treatment facility near Lumberton, N.C.

The plant had been expected to discharge up to 500,000 gallons a day of treated wastewater into a municipal treatment system that empties into the Lumber River, the source of drinking water for Lumberton.

States have the right under EPA law to regulate toxic waste treatment within their borders as long as their decisions are based on human health and environmental concerns and do not "unreasonably" restrict the movement of wastes within their borders.

Initially, EPA officials said they wanted to "send a message" to the states that regulations should not be used to block unpopular facilities. The agency responded to GSX's petition by starting proceedings to withdraw North Carolina's power to set conditions for hazardous waste treatment in the state.

But the proceedings were put on hold until EPA Administrator William K. Reilly entered office early last year and decided to air the issue fully. An administrative law judge in North Carolina held hearings on the case and in December affirmed the state's right to issue more stringent regulations.

A final decision is supposed to be made by the EPA administrator. But Reilly delegated it to EPA regional administrator Daniel W. McGovern after environmental groups complained Reilly had engaged in improper contacts with officials of the hazardous waste industry at a breakfast meeting.

McGovern said that while the North Carolina law made the GSX plant economically infeasible near Lumberton, it did not prevent such a facility from being constructed at other places in the state. Moreover, he noted, the company could have built a smaller plant at the Lumberton site. "Therefore the law cannot be said to act as a prohibition on the treatment, storage or disposal or hazardous waste in North Carolina," McGovern concluded.

GSX vice president Roger Davis said the ruling will encourage every state to establish its own program to keep unpupular hazardous waste facilities outside their borders. "Every state is trying to outdo its neighbor," he said in an interview.

Velma Smith of Friends of the Earth applauded the decision as a "clear victory for states' rights. It's EPA saying it will stay out of it when states adopt more stringent laws that industry doesn't happen to like."