A federal grand jury yesterday in Dallas indicted former thrift operator Jarrett E. Woods Jr., one of the Justice Department's top savings and loan targets, on charges that he conspired with borrowers to divert more than $18 million in loan money from Western Savings Association.

The 37-count indictment alleges that Woods directed the diverted funds be used to make payments on other Western loans in order to cover up the thrift's insolvency and hold off regulators, according to U.S. Attorney Marvin Collins in Dallas. Western's eventual collapse in September 1986 will cost the government an estimated $1 billion or more.

"The indictment of Jarrett Woods means we have corraled one of the biggest savings and loan bandits in Texas," said Attorney General Dick Thornburgh, who held a press conference at the Justice Department to announce the indictment. "The free-wheeling lifestyle and fraudulent management practices that led to Western's collapse really helped set the trend for our national thrift crisis."

According to the indictment, Woods concealed the fact that Western provided the funds to make payment on loans it had made "so that he could maintain control of Western and receive financial benefits from Western ... ." Bank regulators found that in one two-year period, Woods made $3 million in dividends from Western's holding company, according to published reports.

The charges carry a maximum prison term of 185 years and more than $8 million in fines.

Woods's indictment came on the day the government began its case against another Dallas S&L kingpin, Donald R. Dixon. Dixon is charged with using funds from Vernon Savings and Loan to pay for prostitutes and a beach house for his personal use and to make illegal political contributions.

Prosecutors said in opening statements that Dixon pressured bank officers and borrowers to put up funds for his illegal activities.

Dixon's attorney, Billy Ravkind, said in his opening statement that prosecutors had selected Dixon as a scapegoat. Politicians came to Dixon with their hands "open and outstretched," he said.

Ravkind cited an example in 1985 when Dixon entered his Solona Beach, Calif., home to find Sen. Alan Cranston (D-Calif.) sitting on a sofa.

"Don had never met Mr. Cranston," Ravkind said. "But there he sat like an old friend. Cranston listened to Mr. Dixon talk about problems in the industry and he cocked his head and said he was so sorry. But he {Cranston} certainly could use $20,000 to $30,000. Don learned just how it works."

Murray S. Flander, Cranston's spokesman, said last night that Ravkind's statement was a "blatant lie." He said Cranston was invited to Dixon's beach house and went because he considered Dixon a potential contributor.

"But he never asked for any money in that context," Flander said. "He's not sure he ever asked him for any money."