Rules that govern how telephone companies compete for local customers will expire next week under a decision announced yesterday by the Bush administration, throwing into question how much residential customers and small businesses will pay for service and what choices they will have.

The Justice Department said it would not appeal a federal court's rejection of government rules requiring regional phone companies to lease their networks to rivals at a discount. The rules now are set to expire on Tuesday. The Justice Department's decision is a huge blow to struggling long-distance companies such as AT&T Corp. and MCI Inc., which used the regulations to launch their own brands of local service. It also adds confusion to an industry already roiled by technological changes, as wireless phones proliferate and Internet phone service becomes a reality.

About 19 million telephone lines -- about 14 percent of the local phone market -- are served by companies that relied on the government regulations. AT&T said yesterday that the decision could lead it to raise rates and possibly abandon local service in some markets.

"Failure to appeal this case could do lasting damage to the entire competitive telecom industry -- and will lead inevitably to higher prices and fewer choices for Americans," James W. Cicconi, AT&T's general counsel, said in a prepared statement yesterday.

The Justice Department declined to comment on its decision, which followed months of intense lobbying by the nation's largest telecommunications companies. Sources on both sides of the issue said the senior White House staff was divided.

The political staff, led by senior adviser Karl Rove, raised concerns that rising telephone rates could hurt President Bush in the upcoming election. The policy staff opposed an appeal, saying the rules run counter to Bush's efforts to reduce business regulation.

The White House had hoped to avoid a decision by calling on the companies to reach voluntary agreements with one another. But negotiations, including a recent round hosted by Federal Communications Commission Chairman Michael K. Powell, failed.

The rules at the center of yesterday's decision are a byproduct of the Telecommunications Act of 1996, an effort by Congress to introduce competition into the telephone market. At the time, the industry was largely shaped by a court decision that spun off several regional companies from AT&T. The regional companies were given the local phone business, and AT&T was handed the long-distance market. The act allowed the regional giants into the long-distance market if they would open their local markets to competition. AT&T and other long-distance carriers were allowed into local markets.

The regional companies have outperformed their rivals in the past eight years. Verizon Communications Inc. is now the nation's largest local-phone company with a territory from Maine to Virginia. It is also one of the nation's largest long-distance providers with more than 17 million customers. In some states, including New York, it is the largest provider of long-distance service. Verizon and other regional companies have successfully invaded the long-distance market by bundling local and long-distance services.

While Verizon's long-distance business grows, AT&T and MCI regularly report double-digit declines in their consumer businesses. AT&T and MCI claim that without the ability to offer local phone service at competitive rates, they may be forced out of the residential market altogether.

A federal court in Washington found that the FCC had failed to adequately justify the need for the rules. The Justice Department declined to appeal that finding to the Supreme Court.

"This demonstrates that the Bush administration is willing to let the nascent local competition dry up and disappear, handing monopoly telephone service back to the Bell giants," said Gene Kimmelman, director of the Washington office of Consumers Union.

The regional phone companies disagreed and said the Bush administration's decision was an important victory.

"Consumers have been well served by the Solicitor General's conclusion that this is not a case for the Supreme Court," Herschel L. Abbott Jr., BellSouth Corp. senior vice president for governmental affairs, said in a prepared statement.

Abbott said BellSouth would not cut off service or raise rates after Tuesday to wholesale customers such as AT&T and MCI "without going through established processes." A BellSouth spokesman noted that any changes to contracts must be approved by state regulators.

The regional Bell companies argued that the prices imposed by the rules forced them to subsidize competitors with deep discounts. They also argued that the subsidies were so steep that they discouraged companies from building their own telephone networks.

AT&T and other companies countered that it would be virtually impossible to offer consumers competition without rules that allow them to lease networks from rivals at discounts. They also argued their wholesale rates were fair and allowed the regional giants to recoup a reasonable profit.

Shares of Verizon rose 31 cents to close at $35.86 yesterday. AT&T stock closed at $16.56 a share, down 39 cents.

While Solicitor General Theodore B. Olson declined to pursue the case, AT&T and other competitors have said they will appeal on their own. However, legal experts and industry analysts said the chances are slim that the Supreme Court would agree to hear an appeal after the solicitor general passed on it. "The solicitor general is often seen as the tenth justice. The court is very unlikely" to take the case, said Blair Levin, a telecommunications analyst and former FCC chief of staff.

CompTel/Ascent, a coalition of companies that compete in the local phone business, said recently that if the Justice Department would not appeal the decision by the U.S. Court of Appeals for the D.C. Circuit, it would air ads attacking the Bush administration in the months before the presidential election. Yesterday, the group said it had not yet decided whether it will air the ads, which it said have already been prepared. "Our primary focus right now is filing for a stay ... today or tomorrow. Beyond that we haven't made any final decisions," said H. Russell Frisby Jr., chief executive of CompTel/Ascent.

Scott C. Cleland, a Washington-based telecommunications analyst, said the groups are not likely to attack the Bush administration.

"It's a bluff," Cleland said. "Why make a mortal enemy if this is something you have to live with for four years?"

AT&T's Cicconi said the competitors will not pull their punches. "We are not going to conceal from our customers the reason why we are raising prices or exiting markets," he said. "We owe them an explanation of what happened and why. Otherwise they are going to blame us."