An international panel is to decide in April whether an American law banning the import of undersized lobsters violates the free trade agreement between the United States and Canada.

The panel, which was scheduled to hear arguments on the dispute Monday, is to recommend a resolution in mid-May that could range from leaving the law as it is to banning it altogether. The board of three Americans and two Canadians also could call for a compromise."Lobster fishing is the backbone of hundreds of coastal communities in Canada. Millions and millions of dollars in lost income are at stake," said John Kearney, who represents the Maritime Fishermen's Union in Nova Scotia.

Bob Brown, director of the Maine Import-Export Lobster Dealers Association, said the dispute is "on everybody's lips on both sides of the border."

At issue is a bill that President Bush signed into law in December, prohibiting the importation or interstate transportation of lobsters that do not meet federal minimum-size standards.

Lobsters that are shorter than 3 1/4 inches from the eye socket to where the tail begins are illegal under the new law. By 1992, the minimum legal size will be 3 5/16 inches.

But in Canada, lobster fishermen can catch lobsters 1/16th of an inch shorter than those allowed in the United States.

Lobstermen, dealers and industry observers throughout New England and the Canadian Maritime provinces say the panel's decision could have a major impact on the industry.

"It could change the way lobsters are marketed," and more significantly might change the way the government regulates lobster management, said University of Southern Maine Professor Charles Colgan, a former state economist.

Canadian officials argue that the law is purely a trade barrier that violates the U.S.-Canada free trade agreement. They say their country has plenty of conservation laws, and the United States has no right to tell them how to manage their resources.

American lobstermen have complained to Congress that they could not compete against the smaller, less expensive Canadian lobsters, which were being shipped to American markets. The new law barring the smaller lobsters could mean a potential loss to Canada of $20 million to $30 million in exports each year.

American officials maintain that the law will protect the lobster population by allowing more lobsters to live long enough to reproduce.