A federal judge, ruling on a case involving two local housing projects, has called a widely used administration regulation affecting housing for the poor "arbitrary and capricious," and unlikely to protect low-income tenants.

Residents of Dominion Gardens and Bruce Street apartments in Alexandria filed suit last year against the Department of Housing and Urban Development, Artery Organization Inc., and Conrad Cafritz Jr., who sold the projects to Artery, challenging developers' plans to convert the complexes to luxury apartments. The higher rents could force the estimated 2,000 residents of the two projects out of their homes, the tenants say.

The developers applied for HUD loan insurance under a program available for projects that reserve at least 20 percent of the apartments for low-income tenants or are located in neighborhoods meeting HUD's minimum standards for a distressed area. The tenants also sued HUD because it accepted the applications.

District Judge Harold H. Greene rejected a government motion to drop HUD from the lawsuit several weeks ago, citing the "bizarre nature" of a HUD regulation designed to help poor tenants keep their apartments.

The rule passes to lenders the responsibility for enforcing a federal law requiring HUD to minimize displacement of residents when apartment projects are renovated. Critics say this practice is akin to putting a fox in charge of a hen house.

Greene's stinging criticism boosted tenants' hopes that he will rule in their favor. They say the controversial regulation is illegal and are asking that HUD be ordered to drop it, said Florence Wagman Roisman, an attorney for the tenants.

The renovations will boost rents from $385 to $715 for a one-bedroom apartment and from $450 to $845 for a two-bedroom unit.

If they are evicted, residents of the two complexes probably will look for new apartments in Northern Virginia buildings "and such housing, it appears plain, is likewise ripe for redevelopment," Greene said. The judge said he would not drop HUD from the suit in part because the Dominion Gardens and Bruce Street tenants probably "will continue to be subject to repeated displacement due to rehabilitation."

Greene's ruling was welcomed by tenant advocates, who say Northern Virginia faces losing thousands of low-cost apartments because of rehabilitation.

After Greene ruled against HUD's request, government attorneys filed another motion in mid-May repeating the agency's request to be dropped from the case. The second motion repeated the department's argument that Greene's court, the U.S. District Court for the District of Columbia, does not have jurisdiction in the case. This was the same argument federal attorneys used in the first motion, but they "elaborated" on it in the second motion, a HUD spokesman said.

Greene has not ruled yet on the second motion.

The owners of the two Alexandria apartment complexes dropped their HUD insurance applications after the suit was filed. Greene said, however, that the validity of the regulation did not necessarily become "moot because one specific application of the regulation has become moot."

Greene said the rule "can roughly be analogized" to passing on to drug companies the Food and Drug Administration's obligation to insure that drugs are safe for use, or allowing banks to enforce "restrictions and limitations on the power" of banks now overseen by the Federal Reserve Board and the Comptroller of the Currency. He also said the regulation is flawed because it does not contain any standards for lenders to follow.

The judge said banks and thrift institutions "may safely be assumed to have no economic or other interest in minimizing tenant displacement; their interest, where they lend money for renovation, is to maximize such displacement," at least for tenants who cannot pay the resulting higher rents.

Greene barred the eviction of the estimated 2,000 residents of the two complexes last February. He ordered a full trial in the case, saying the planned renovation of the 691 units into luxury apartments could result in discrimination against blacks and other minorities. Federal fair housing law prohibits discrimination on the basis of race, national origin and religion.

The trial is scheduled to begin next month.