The EPA weighed more heavily the watershed's satisfactory compliance with the Clean Water Act.
One local environmentalist said she was surprised by the findings.
"I think they really need to take another look," said Sherry Evasic of Hedgesville, W.Va., president of the Blue Heron Environmental Network.
Evasic said horror stories she has heard about sewage smells near area creeks lead her to believe that the watershed is in worse shape than the EPA says.
Evasic, 37, said pollution has clouded the Conococheague Creek since she was a young girl, and ice skated on the frozen creek near Williamsport.
"That is the last time that I can actually recall seeing that section of the Conococheague clear to the bottom," she said.
Norman DeLawder, district conservationist with the USDA's National Resource Conservation Service, said there is room for improvement in the watershed.
The loss of wetlands often goes unnoticed because they are taken for development one small chunk at a time.
"There's an awful lot of area classified as wetlands people don't think of. They're kind of lost in the system," DeLawder said.
But another government agency charged with protecting the watershed argued that much has been done in the last few years.
The Franklin County (Pa.) Soil Conservation District reviews every construction project larger than five acres to determine its impact on wetlands, said Manager Ernie Tarner.
If wetlands are disturbed, developers must put money into a fund that develops other wetlands.
Wetlands have been built or improved recently in Orrstown and along Dennis Creek in Hamilton and St. Thomas townships, he said.
"I think we're probably in the plus column right now for wetlands," he said.
As for agricultural runoff, more than $1 million has been spent in the county over the last decade to fix runoff problems, he said.
"A lot of farmers have done work on their own. We're definitely improving on it," he said.
Agricultural runoff has been a longstanding unresolved water pollution problem. Federal environmental laws do not cover farm runoff, leaving regulation to the states.
The issue has gained renewed attention in recent weeks with the outbreak of Pfiesteria, a fish-killing microbe, in rivers in Maryland, Virginia and North Carolina. Although the source of Pfiesteria is not certain, it is widely believed to be linked to poultry wastes.
"No one cares about who lives downstream and only now people are beginning to care about what's going on upstream," said Mike Dudash of Sharpsburg, an aquatic biologist who teaches children about the importance of protecting the environment.
Nationwide, more than half of the nation's watersheds examined have water pollution problems due primarily to runoff from farms, factories and sewer systems, the EPA said.