When Alabama State Treasurer Melba Till Allen was found guilty last week of using her office for personal gain, the decision by the circuit court jury was just the latest development in a fast spreading scandal that is rocking banking and political circles here and raising questions in Washington.

As state treasurer, Mrs. Allen, 44, decides in which banks to deposit some $400 million in tax and other revenues that flow into the state treasury each year.

As one state official describes it, "This one persons says, 'This bank gets money, that one doesn't.' Not even the governor has that kind of power."

Private banks handle state funds in two ways: As time deposits, on which the banks pay a set rate of interest, or demand deposits, which earn no interest. Either way, banks are able to profit from the use of the funds. And in the rural areas of Alabama, where the deposits rise and fall with the crops, the tiny banks often rely on state funds to survive.

Evidence presented by District Attorney James Evans during the three-day trial showed that Allen often deposited state funds in banks in exchange for loans to herself and her business associates.

Indeed since she assumed the $25,000-a-year elected office in 1975, Allen allegedly arranged about $3.5 million in loans from 58 banks in 31 counties.

But behind the carefully worded indictments that are still being returned by a county grand jury is a tale of high farce and low finance.

In Washington, the Allen scandal has again raised questions about the effectiveness of federal bank regulators. Examiners from the Federal Deposit Insurance Corp., who audit the books of most state-chartered banks, reportedly spotted a pattern of questionable loans to Allen as early as the spring of 1976.

Last week, at hearings before the Senate Banking Committee, Chairman William Proxmire (D-Wisc) asked FDIC Chairman George LaMasitre why his agency did not take any action on Allen's loans. LaMasitre replied that none of the loans "undermined the safety and soundness of the banks."

Authorities here claim that the FDIC reports and other investigations show that major banks shifted Allen's overdue loans among themselves to avoid detection by examiners. The state's powerful banking establishment may now be drawn into the criminal case.

"I think it will be impossible for the grand jury to ignore the involvement of certain bankers," District Attorney Evans says.

The Securities and Exchange Commission and the Controller of the Currency, who oversees national banks, sent a team of investigators here last month. The SEC followed with a questionnaire to the publicly owned Alabama bank holding companies on the Allen affair - a first step for a major investigation.

Allen apparently was not the first person in the treasurer's office to use state funds as leverage for personal loans. Frank Barefield, who has been assistant state treasurer to both Baggett and Allen, is also under investigation by the grand jury for his handling of state funds.

What got Allen into trouble, however, was her bewildering array of losing personal business ventures. The trial brought out that all of them soaked up huge amounts of capital which she was able to borrow virtually collateral-free from banks.

The ventures included a truck company run by her husband Marvin, who is a truck driver, a patent on a pea-and-bean-shelling machine, numerous real estate ventures, a wicker furniture manufacturing company, a movie company to produce religious films, and a scheme to build a religious theme park on an Alabama mountaintop about 145 miles from the nearest interstate highway.

Called Stars Over Alabama, the theme park received a serious setback in August when its only building burned to the ground. The fire, which started in three separate places, was set deliberately, according to local fire officials. Not long after, the inventory of the wicker company was destroyed when a fire swept through a Selma store. That fire, too, was described as arson from the local district attorney.

Allen's partners included a couple of middle-level state employes. Another Allen associate was John Firth, who was on parole after serving six months of a four-year sentence for defrauding the Veterans Administration of $2.5 million.

Yet another Allen associate, Vance Dyer, was arrested last year for importing 4,300 pounds of Colombian marijuana. Allen appeared as a character witness at his trial last summer in Jacksonville, Fla. Nevertheless, Dyer received a four-year sentence, which is under appeal.

Other Allen associates include Walter "Red" Hainey, an insurance agent recently indicted for failing to remit premiums to insurance companies; William Beechum, indicted for perjury before the grand jury investigating Allen; and Billy Puckett for violating securities laws by selling unregistered limited partnerships in an Allen movie venture. All three have pleaded not guilty.

The beginning of the end for Allen was triggered by an anonymous note to the Birmingham News. The letter which later turned out to have been written by John Firth, pointed out that Allen had not made public all her bank loans as required under Alabama's ethics laws.

The News brought the letter to the Alabama Ethics Commission. The commission, which had been under attack by state politicians since it was created by a legislative fluke in 1973, turned the case over to District Attorney Evans instead of to the state attorney general as would be expected.

The reason, according to sources, was that Attorney General William Baxley is running for governor, and questions have been raised about his campaign funds, some of which have come from bankers.

The district attorney met resistance of another kind. In March, Lula May Carter, a waitress at the Holiday Inn located in the "Stars" theme park area, was deposed by District Attorney Evans about a conversation she overheard between Allen and an associate allegedly discussing her loans and state funds.

On her way home, Carter was dragged from her car and beaten. Later, she appeared on TV with Allen charging that the district attorney had pressured her into telling a false story. The grand jury investigated the charge by Carter and reportedly found it groundless.*