The Agriculture Department wants to slaughter 365 sheep under quarantine at two Vermont farms because they may have come in contact with mad cow disease.

Controversy over the sheep's fate underscores policy makers' continuing wariness over the family of degenerative brain afflictions believed to be spread by oddly shaped proteins called prions.

There has never been a case of mad cow disease, known as bovine spongiform encephalopathy, or BSE, reported in the United States, but at least 16 people died in England in 1996 from a similar disease, apparently after eating contaminated beef.

And while alarm has subsided over the possibility that cows contract BSE from feed derived from sheep brains, unease lingers over whether sheep can carry BSE for years after ingesting feed derived from contaminated beef.

"This is brand new," said George Beran, a veterinary professor at Iowa State University and author of a handbook on diseases that affect both humans and animals. And rudimentary detection methods make "depopulating the herd" the only sure way to combat a prion disease outbreak.

It was uneasiness over the science of BSE that prompted the Agriculture Department to keep a close watch on 65 East Friesian and Beltex milk-producing sheep imported by Vermont farmers Larry Faillace, of Warren, and Houghton Freeman, of Greensboro, in early 1996.

The importers wanted to build a new cheese-making industry. "The average American sheep does 100 pounds of milk in a year, while ours do 1,000 pounds," Faillace said.

The USDA was initially concerned about whether the sheep were infected with scrapie, the ovine equivalent of BSE, but the animals were quarantined and cleared both in Belgium and the United States.

According to Linda Detwiler of the USDA, however, European research released just after the herd's arrival in Vermont suggested that BSE could be transmitted to sheep. And immediately after that, England reported that deaths from brain disease could be linked to consumption of contaminated beef during an outbreak of BSE in the mid-1980s.

The Agriculture Department began to monitor the Vermont herd, buying animals the farmers wanted to sell and closely examining the brains of animals that died. Faillace and Freeman bred their herds and made their cheese. This month, they had 365 animals between them.

Questions about BSE and its cousins remain unanswered. Beran said scientists are certain that scrapie--a disease with a long history--was transmitted to cattle some time in the "recent past," because the 1980s outbreak was apparently BSE's debut.

But scientists have not been able to determine how or when the cross-species transfer was made, nor have they been able to duplicate it in the lab, Beran added.

Research was made even more difficult because the prions for scrapie and BSE are almost identical. Nonetheless, at this point, scientists have reached consensus that BSE is transmitted when cows eat feed made from bovine--not ovine--brain tissue, which is offered to them as a protein supplement, Beran said.

This, however, did nothing to dispel uneasiness over whether sheep could carry BSE and transmit it to cattle. In September 1998, the European Union issued an opinion paper saying that Europe could not be sure that its sheep were uncontaminated.

The next month, the state of Vermont--acting on the advice of the USDA--put the Belgian herds under quarantine, forbidding the sale of breeding stock or meat. USDA and the owners now are at an impasse. The agency wants to buy the sheep and destroy them, but Faillace and Freeman are refusing to sell.

"There's nothing wrong with our sheep, and the risk is theoretical," said Faillace, who says he can sell all the cheese he can make. "We just want USDA to get off our backs."

But Detwiler, senior staff veterinarian for the Animal and Plant Health Inspection Service, said the Agriculture Department would persevere, even though the sheep were ostensibly disease-free: "We're just trying to be ultraconservative."