NEW YORK (AP) _ A federal judge dismissed on Friday a lawsuit brought by federal regulators against Price Waterhouse & Co., saying the government failed to prove the accounting firm acted unreasonably or unprofessionally in a 1980 audit.

The Securities and Exchange Commission sued Price Waterhouse and three of its partners in 1985, charging auditors ignored abuses at Chicago-based AM International Inc.

But U.S. District Judge John Sprizzo ruled the SEC ''at best'' proved only that ''a reasonable accountant would, might or should have handled the matter differently.

''It has utterly failed to prove, however, that what (Price Waterhouse) did was 'highly unreasonable' or 'an extreme departure from the standards of ordinary care' used in the accounting profession.''

The SEC action stemmed from a favorable opinion issued by Price Waterhouse after its 1980 audit of AM International.

AM International, a supplier of graphics materials and word processing systems, filed for bankruptcy court protection two years later.

As a result of AM's failure to apply generally accepted accounting principles, fiscal 1980 pre-tax earnings were overstated by at least $22 million, the SEC suit charged.

SEC regional administrator Richard Walker was not immediately available to comment, said his secretary.

Price Waterhouse spokesman Ken Koprowski said he had not seen the decision and could not comment.