The National Football League Players Association announced tonight it has canceled its all-star games Sunday and Monday following a court decision clearing the way for the NFL to sue the players in state courts to stop them from participating.

The decision, by the U.S. Court of Appeals in Washington, overturned an Oct. 6 ruling by U.S. District Judge John G. Penn that such lawsuits had to be filed in U.S. District Court in Washington. It was a setback for the NFLPA, which is counting on the games to help finance its strike against the league.

Turner Broadcasting System was paying a minimum of $500,000 a game for television rights. NFLPA Executive Director Ed Garvey said the ruling will not affect the union's ability to strike. He also said the union will continue to press its contention in U.S. District Court that the NFL's standard player contract is illegal.

But a union spokesman said it appeared unlikely the NFLPA would be able to continue with its all-star games, which had been scheduled for Sunday afternoons and Monday nights through mid-December

"It's a setback," Garvey said. "We have lost the battle but not the war." He said the union does not have the money to defend players against individual lawsuits in state courts across the nation.

"What they (the NFL) have won is the right to use their economic might to stop the players from participating in these games," Garvey said.

Jim Miller, a spokesman for the NFL Management Council, the league's labor negotiating arm, said management is "delighted" with the decision.

"This clears the way for us to pursue legal remedies against violations of individual player contracts and we will proceed to do so," Miller said in a prepared statement.

The NFL contends that its standard player contract prohibits playing football for anyone but the NFL, and legal action had been initiated, before Judge Penn's Oct. 6 ruling, in Dallas, St. Louis, Buffalo and Miami to enforce this provision and stop the players from participating in the union's games.

If necessary, the Redskins are prepared to seek an injunction preventing their players from participating in the all-star games, team sources said last night. Fourteen Redskins, the second-largest contingent, played in the first two games.

The first two of the all-star games were played Sunday in Washington and Monday in Los Angeles. Attendance was less than 10,000 for each. Next weekend's games were to have been played in Toronto and Atlanta.

Just as bargaining got under way this morning, the ninth day of mediation, management sources confirmed accounts published today in the Chicago Tribune and the Baltimore News-American that mediator Sam Kagel had told the union he did not like its concept of a trust fund from which players' salaries would be paid on a seniority-based scale with performance incentive bonuses.

The stories immediately were denied by the union, and later Kagel appeared at his daily news briefing and termed the stories "a false report . . . "

Regardless, Kagel, as the mediator, has no authority to rule in the dispute, although he does have considerable impact on the negotiations.

Bargaining and mediation continued throughout the day and into the night, but there were no signs of a breakthrough that could end the 30-day-old strike. Management was reported to be pressing for a recess to allow each side to reevaluate its position, but Garvey said he opposed that and wanted to continue the talks.

There was no indication today that the league was on the verge of opening training camps, as the union had maintained Tuesday.

Sources said the league still was convinced that not enough players would return to justify such a move, so it apparently will continue to honor Kagel's request to keep the camps closed while mediation continues.

Before camps are opened, the league evidently will first conduct a team-by-team survey to determine player response. It would like to avoid having one team getting 35 players into camp and another only 10, creating a competitive imbalance.

The controversy over Kagel's views on the union's demand for a trust fund goes to the heart of what the strike is about. The NFLPA sees the fund as a form of job security for its members.

It has been the union's contention -- denied by management -- that NFL clubs tend to cut older players from their rosters because they are making too much money.

Establishment of the fund would eliminate the economic motivation to cut such players, the union argues, because each club would be spending a fixed amount on salaries, and the club's treasury would not be affected by how much of that money went to an individual player.

The union also wants the NFL to guarantee that 50 percent of all current and future television money be donated to the fund, which would be administered by an independent trustee such as a bank.

Management says it opposes both the concept of a fund and the demand for 50 percent of television revenues. It has said it will accept a minimum wage scale, but only if the scale leaves room for individual negotiations.

Publication of the accounts that Kagel had told the NFLPA he did not like the concept of a trust fund clearly angered union officials.

In a prepared statement, spokesman Dave Sheridan said, "The mediator has never expressed an opinion against our fund or the wage scale to us privately or in negotiations. If the management is confirming this fiction they are telling an untruth."

Later, at his news briefing, Kagel said he had no intention of responding to every rumor that emerges from the talks. UPI