In addition, Ward B. Stone, a Conservation Department wildlife pathologist nicknamed the ''toxic avenger'' for frequently contradicting the agency's official position, rode into Syracuse and took his own tests. He said he found a contaminated pocket on the Marley site with PCB's at four times the state's hazardous level of 50 parts per million.

The agency's local engineers had declared the Marley site safe, and they repeated that assessment after Mr. Stone left town and they were unable to replicate his findings. But the infighting among state environmentalists caused a stir in the local media and infuriated Pyramid officials.

When Pyramid proposed the Oil City redevelopment three years ago, it committed itself only to the two projects it saw as catalysts, Carousel Mall and Franklin Square, another part of Oil City whose decaying brick warehouses have been converted into condominiums and offices connected by brick walks, Victorian-style lampposts, benches and a park with a $35,000 bronze statue of Benjamin Franklin. But it was assumed that the company would do more. Now Pyramid says it will only promote Oil City's development, primarily because of the environmental problems.

''I fear our history will deter other developers, but the promise of Oil City is still there,'' said Bruce A. Kenan, a Pyramid partner in charge of the Lakefront Redevelopment, as Oil City's renewal is called.

Other factors could also leave the rest of Oil City fallow.

The city government now faces two uphill struggles. The first is the condemnation of 80 acres, dotted with 67 oil storage tanks and owned by nine oil companies. Although Pyramid has created a new oil tank farm for their relocation six miles away in the town of Van Buren, several oil companies want to stay put, and legal battles loom.

A New Federal Regulation

The second is the acquisition of the barge canal from the State Department of Transportation, so that a harbor can be developed with promenades and boat slips. The agency would rather consolidate its barge operations than abandon them.

A deterrent to more private investment is a new Federal rule with the effect of classifying petroleum-contaminated soil - of which there is much in Oil City - as hazardous waste, therefore making any cleanup of the oil-tank areas more complex and costly.