WASHINGTON -- The White House has dropped its plans to propose folding the Clean Water Act revolving fund into a block grant, Bush administration and state officials said this week.

The decision came because of disagreement with state groups about whether to reauthorize and continue funding the program, officials said.

President Bush is still likely this month to announce a block grant initiative encompassing education and several other areas, but a water quality block grant proposal will not be included, said White House intergovernmental liason Debra Rae Anderson. The announcement is likely to be made along with leaders from the National Governors' Association and the National Conference of State Legislatures.

The water grant idea was discarded in private negotiations with the state groups as a part of a "winnowing out process," he said. The talks were characterized by broad agreement on the "philosophy and concept" behind block grants, but also by disagreements on what to do with particular programs, she said.

The state groups decided they could not support a joint proposal in the clean water area after it became clear that the Office of Management and Budget -- which has been drafting the block grant legislation for the administration -- would not agree to reauthorize funding for the $2 billion a year municipal wastewater treatment program, said Jim Martin, the governors' association's state and federal affairs director. The program is scheduled to end in 1994.

"The administration wants to continue phasing out the program" and wants the states to use the money now budgeted for municipal projects in the future for cleaning up other kinds of pollution, such as contaminated groundwater and the runoff from city streets and farms, he said.

OMB Director Richard Darman has a "bottom line," which is to "hold the budget numbers as flat as he can," Mr. Martin said, and the OMB also contends taht last year's budget agreement left no rom to continue funding the program under domestic spending caps covering the next four years.

By contrast, the state groups had proposed not only to reauthorize the municipal financing program, but to increase federal capitalization grants to the states to pay for cleanup of the growing list of other water pollution problems, he said.

The split means that "clean water seems to be out now, unless the administration changes its tune overnight," he said.

As with the highway and mass transit programs, which also will not be folded into any proposal new block grant, the reauthorization process for the clean water program is already well underway in Congress, and issues of consolidation in that areas will be dealt with separately, he said.

The disagreement over the clean water program came as no surprise to some. "It's very predictable" that the OMB would refuse to support a straight reauthorization, said Linda Eichmiller of the Association of State and Interstate Water Pollution Control Administrators.

More surprising, she said, were the indications that the OMB may agree to renew funding for the program if it is radically restructured. as proposed in a clean water bill pending in the Senate.

The Senate bill would continue funding the program and expand its scope, but at the cost of eliminating the current municipal financing mechanism with its unique bonding and loan capacities and converting it into a grant program.

State groups came out forcefully in opposition to the Senate proposal yesterday in testimony before the Senate Environment and Public Works Committee. They argued that the 51 state revolving funds have been largely successful and should be perpetuated as the chief form of financing for water pollution control and other environmental infrastructure projects.

"We fear [the Senate bill] could be a fundamental reversal in the direction which Congress headed the program only four short years ago," said Robert Lenna, director of the Maine Municipal Bond Bank and officer of the Council on Infrastructure Financing Authorities.

Besides the clean water program, the administration has jettisoned a number of other candidates for inclusion in its block grant initiative in the hopes of winning the support not only of the state groups, but of local lobbying organizations, which have been openly opposed to creating new block grants.

"They know they've go to have us on board" to convince skeptical Democrats in Congress to accept the idea, said Frank Shaforth, lobbyist with the National League of Cities.

Shortly after announcing the block grant initiative in its February budget, the White House dropped a proposal to include the $3.2 billion Community Development Block Grant program because of protests from local groups, who preferred that the grants continue to be given directly to municipalities rather than be diverted into larger state block grants.

The White House has continued to meet with officials from the League of Cities, the National Association of Counties, the U.S. Conference of Mayors and other local groups to seek their cooperation -- if not open support. Ms. Anderson said she expects most of the groups -- except the mayors -- will be generally supportive when the President announces the intiative, even if they "disagree on details."

But Mr. Shafroth said the announcement may only serve to "save face" because the block grant proposals" are not going anywhere in Congress for all sorts of reasons." Primarily, members of Congress doubt the administration's willingness to maintain funding levels for the programs, he said.

"There has to be a realistic commitment [to funding] by the White House, not a pretense. The way the clean water stuff fell apart clearly shows no serious commitment," he said.

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