Busch's Chesapeake Inn, a popular restaurant and stopping point for thousands of vacationers crossing the nearby Bay Bridge, was destroyed this morning by a fire that left only the exterior walls and a familiar large red lobster sign standing.

Anne Arundel County fire officials said that the fire broke out about 3 a.m. and was under control about 7. Fire fighters said they were hampered by the scarcity of water hydrants near the sprawling restaurant on Rte. 50, 2 miles west of the bridge. They also said the lack of a fire warning or sprinkler system contributed to the damage.

Owner Robert Bush said the $500,000 fire did not mean an end to the restaurant he built from a small hamburger joint to a million-dollar seafood business in little over 20 years.

"I do plan to rebuilt just as soon as we can get the ball rolling," Busch said.

Busch, his wife Joan and a large number of the 130 employees of the inn watched the black smoke and flames throughout the morning. Many were called by friends either on the telephone or on citizens band radios as soon as the word went out this morning.

"A lot of us have worked here as it grew," explained Cheryl Fowler, a clerk for 10 years at the restaurant. "It's a family restauratn. Not only for the Busches but for a lot of us. My husband works here, too. There are a lot of couples who depend on this for a living. More than that."

For travelers to and from the ocean beaches, this restaurant was popular eating spot - some 5,000 customers served every week - as well as a notification with its red lobster sign that they were approaching the Bay Bridge.

Vice President Agnew, President Nixon, Mayor Schaeffer, all the politicos came here at some time," said Wilma Ashley, waitress for five years at the inn. "And Bing Crosby, he came here every year on his way goose hunting, Robert Mitchum came here, too, and Robert Redford."

The restaurant once served local customers waiting for ferries to cross the bay. That was in the days when pizzas, hamburgers and crabcakes made up mot of the very small menu.

In its modern form, the restaurant had three dining rooms, a bar and most recently a liquor store, all usually filled. On weekends there were long waiting lines outside.

The only victims of the fire, in fact, were the live lobsters in the back room and the exotic tropical fish that swam in the decorative tanks inside the dining rooms.

Yesterday afternoon only a heap of steaming rubble was left of the restaurant that produced some $2.5 million in business each year. Fire officials said 35 engines were used in the four-hour battle.

Already bulldozers have begun a clearing operation so that a new structure can be thrown up longside the highway. Mrs. Busch told an employee that since she and her husband built the restaurant single-handedly before, they can do it again.

"Joan (Busch) said she definitely would rebuild, she decided that as soon as she heard the news," said Naomi White, hostess for seven years."She also said she hoped it was a bad dream. That she could go back to sleep and the clock would go off and she'd realize the fire didn't happen."