Undated (AP) _ Decomposition of fire-retardant plywood installed in townhouses in many East Coast states is setting off a legal battle that could last years before the courts assign liability for repair bills, officials said Wednesday.

Builders primarily used the fire-resistant treated plywood in townhouses during the housing boom of the early 1980s, said Bill Young, the consumer affairs director for the Washington-based National Association of Home Builders.

Builders in other parts of the nation used a code that had not yet permitted use of the treated plywood, also known as FRTP, he said.

Attorneys for builders and homeowner associations are suing dozens of wood treatment companies and homeowners' warranty companies seeking payment of the $2,000 to $3,000 needed to replace the defective plywood in each of 1 million units Young estimates have the treated product.

''It's such a mess, a real monster lawsuit,'' said Peter Reinhart, an attorney representing one of New Jersey's largest developers, K. Hovnanian Inc. He said he expects the unraveling of the cases to take at least five years.

Not all the plywood is defective. Researchers are conducting tests at the U.S. Forest Products Laboratory in Madison, Wis., to determine the weaker strains of treated plywood, which Young said was used in multifamily housing.

Although lawsuits are pending in Connecticut and Florida, New Jersey seems to be a special focus of the litigation - 45 lawsuits - because the problem was first discovered there in 1987, said E. Richard Kennedy, a homeowner association attorney who is handling more than 30 cases in New Jersey.

Reinhart said K. Hovnanian began seeking relief in the courts after two workers were injured at a condominium in the town of Lawrenceville when a roof gave way, costing $750,000 in repair.

Reinhart blamed much of the legal fight on homeowner warranty corporations unwilling to pay for the repairs.

''They say it's not a major structural defect,'' Reinhart said. ''It's crazy. All the homeowners are looking for is somebody to pay the repairs.''

Ken Kanline, the vice president of sales and marketing for Washington-based Homeowners Warranty Corp., said the policies written since 1981 have not included roof sheathing as a major structural defect after the first year.

He said the company made its decision before problems arose with the plywood and because too often the warping was cosmetic.

''You had a situation where in the sixth year of a home it wouldn't be a structural claim, but it looked cosmetically unsightly,'' he said.

Kanline said the company had received about 120 claims from Virginia and New Jersey, all of which were rejected.

New Jersey state Sen. Thomas Paterniti introduced a bill in the Legislature last week that would set up a state ''Superfund'' to allow homeowners to collect repair money immediately.

The state Department of Community Affairs is awaiting word from consultants on its proposed regulations that the plywood be able to withstand humidity of 100 percent and temperatures of at least 220 degrees, said department spokesman Jay Johnston.

Homeowners of the units with the fire-resistant treated plywood should not go up on the roof but instead check inside an attic for signs of decay, experts say.

Signs to look for are if the plywood's normal light creamy brown color has darkened, if the plywood's smooth surface has turned brittle and splintery or if a white powdery substance is building up.

The white powder is a leeching of the salts used to make the plywood fire retardant. Heat on the roof as low as 150 degrees can prompt the decay, Young said.

Charles L'Hommedieu, the regional director for CNR Realty and Management Co., a property concern in Teaneck, N.J., said his company is continuing to investigate its projects for problems which could arise as time passes.

''These roof systems are projected to start failing within six years,'' he said.

Young minimized the problem's effect on housing prices, emphasizing instead the problems created by the plywood for real estate agents.

''I wouldn't say it's significant in depressing prices,'' Young said. ''It is a major concern for people who sell houses. By law they're required to disclose it. That gets sort of messy for people who just find out about it.''