July 20, 1982

Officials today lifted most of the wateruse restrictions imposed on the 300,000 customers of the Jersey City Water Department on Saturday, but left in place, at least temporarily, the requirement that all drinking water be boiled for five minutes. The water system had been shut down Friday so workers could repair a break in one of the two 72-inch aqueducts from the Boonton Reservoir in Morris County, 26 miles away. The rupture of the pipe occurred Thursday near Harmon's Cove in Secaucus, spilling millions of gallons of water into the Hackensack Meadowlands. The officials are awaiting results of bacteriological tests of the water by the Department of Environmental Protection. They permitted restaurants, taverns and other eating places to open, provided that bottled or boiled water be used for drinking, cooking and washing.

The intruder who surprised Queen Elizabeth in her bedroom at Buckingham Palace 10 days ago will not be prosecuted because he did not commit a criminal offense, the British authorities announced today. The reason, they explained, is that in Britain trespassing is a violation of civil law, but not a crime. The Government decision coincided with a second startling disclosure involving security at Buckingham Palace - an announcement that the police officer in charge of protecting the royal family had resigned after acknowledging that he had had a homosexual relationship with a male prostitute for a number of years. Public Outrage at the Incident These new developments rekindled the fascination and outrage that have gripped a British public aghast that Michael Fagan, a 30-yearold unemployed laborer, was able to spend 10 minutes chatting with the Queen in her bedroom, unbeknown to security men. The disclosure about Mr. Fagan came as he was charged in a London magistrates' court with having entered the palace on a previous occasion, on June 7, and stolen a bottle of wine, as well as with theft and assault arising from other, unrelated incidents.

ANN ARBOR, Mich. ''SMALLER is better'' is the motto these days at the University of Michigan. Faced with severe budgetary problems induced by the state's economic troubles, the school has already eliminated its geography department, and the departments of art, natural resources and education could be the next to go. But at the University of Michigan Law School, things have never been better. The lawn in the middle of the Law Quadrangle, ravaged by generations of touch football players and Frisbee throwers, has recently been resodded; the slate walkways between the Legal Research Building, the Lawyers Club and Hutchins Hall have been relaid. The most impressive feature, moreover, is barely visible: the new underground law library, designed by Gunnar Birkerts, which opened last fall. For a state institution like the University of Michigan, the dramatic new building, a kaleidoscope of light and mirrors and sky, is a financial as well as an architectural feat. It cost $9.5 million, and not a penny of the price was borne by the taxpayers.

An article yesterday about summer cultural events in New York City was accompanied by an outdated photo- graph. The actor Barry Bostwick has been replaced by John Vickery in ''The Death of von Richthofen as Wit- nessed From Earth.''

The Federal Reserve Board lowered its discount rate to 11 1/2 percent from 12 percent. Analysts said other interest rates may now drop slightly in the next few weeks. (Page A1.) Interest rates in the credit markets declined, with those for Treasury bills falling to their lowest levels since last December. (D16.) Manufacturers Hanover Trust and First National Bank of Chicago lowered their prime lending rates a half point, to 16 percent. (D16.) George L. Ball has resigned as president of E.F. Hutton Group to head a new Prudential Insurance subsidiary that includes the Bache Group. The appointment of the 43-year-old Mr. Ball, widely viewed as one of the most effective and innovative managers on Wall Street, appeared to signal that Prudential is dissatisfied with the progress of Bache a year after its acquisition. (D1.)