Environmental Protection Agency Administrator William K. Reilly yesterday was forced to withdraw an ambitious trash recycling initiative after encountering stiff opposition from a new White House council set up to protect industry from excessive regulation.

The Presidential Council on Competitiveness, in its first major regulatory decision, urged Reilly to drop a proposal that the administration had touted just a year ago as a remedy to the nation's burgeoning solid waste problem.

Seen yesterday in the light of a weakening economy, the plan was criticized as unduly burdensome to owners and operators of municipal incinerators who would have been required to divert and recycle one-fourth of recyclable items that would release toxic substances when burned.

Reilly said he would not contest the decision of the council, which has authority to direct the Office of Management and Budget to veto such administrative proposals.

"I understand and accept the reasons for not wanting to push incinerator rules," said Reilly, emerging from a 90-minute council meeting at the White House. "We remain committed to recycling and will consider it in a more appropriate context."

The council, chaired by Vice President Quayle, was set up by President Bush in 1989 to make sure that the executive branch maintains the anti-regulatory fervor of the Reagan administration. As a specific duty, it is supposed to hear appeals by agencies that are unhappy with OMB decisions to veto proposed regulations. The council has six permanent members -- the director of OMB, the secretaries of commerce and treasury, the attorney general, the White House chief of staff and the chairman of the Council of Economic Advisers.

A senior administration official described yesterday's council decision as a "clear indication that Bush is concerned about creeping re-regulation."

The recycling measure was part of the first set of federal air pollution regulations proposed for municipal incinerators, an increasingly popular alternative to landfills for solid waste disposal. The proposal also included requirements to reduce 90 percent of the toxic substances spewed into the air by incinerators, including such carcinogens as dioxin, by installing antipollution devices.

By requiring incinerator operators to remove recyclable items -- all lead-acid batteries and some glass, paper, plastics, yard wastes and metals -- the EPA sought to cut hazardous emissions.

But the primary motivation of the recycling proposal was reducing waste. Although the plan did not mandate recycling of segregated items, operators would have little choice as landfills fill up -- half of them are expected to reach capacity and close in the next five years -- and land disposal costs rise.

The plan called for separation of 25 percent of reusable trash by weight, compared with 13 percent of the nation's trash recycled today.

The proposal elicited opposition from city governments shrinking from the projected costs of separating trash -- New York City estimates were $250 per ton -- and incinerator suppliers questioning why the incinerator industry, which handles 15 percent of trash disposal, should shoulder the entire burden of recycling.

Yesterday's closed meeting of the council was prompted when OMB, which approved the EPA proposal last December, ended up rejecting it.

After hearing Reilly press his case, council members cited various reasons for opposing the recycling initiative, according to administration sources. Among them were concerns that the federal government should not intrude in a local matter, that markets do not exist for some recyclable materials, that recycling of waste would reduce the fuel used by incinerators to generate energy and that recycling should be considered during next year's reauthorization of hazardous waste laws.

But according to one observer, the chief basis of the rejection was philosophical as well as practical. "There was the strong sense that they needed to give business something," he said. "Business has a lot of concern that we lost our commitment to deregulation."