The Virginia General Assembly capped a two month-long constitutional debate over free speech today by striking down a controversial measure that would have imposed jail terms on persons who circulate "materially false" literature during political campaigns.

Meeting during a special three-hour session, the legislators also agreed to appropriate an extra $61.1 million from the state's biennial budget for an across-the-board 4 percent pay raise for state employes effective July 1.

The pay increase corrects what many lawmakers called an injustice done to the state's 73,000 workers during the recently concluded 1982 legislative session. The legislators then granted no salary increase or cost-of-living adjustment for the employes because they relied on a consultant's report, which since has been discovered to have contained more than $39 million in arithmetical errors and which erroneously concluded that state salaries were already competitive with the private sector.

The about-face on the campaign libel measure provoked the liveliest debate during today's session. After it overwhelmingly passed during the waning hours of the regular session last month, civil liberites groups and newspapers charged that the measure would have a chilling effect on political campaigns. The new law, they said, would enable some candidates to easily secure arrest warrants against their opponents from politically sympathetic prosecutors.

Many of the groups argued that it often was impossible to sift out falsehood from truth in the highly charged atmosphere of political campaigns. Others likened the measure to the Alien and Sedition Acts of John Adams' administration, which outlawed writings that brought the president or Congress "into contempt or disrepute."

Despite his avowed sympathy for the goals of the measure's sponsors, Gov. Charles S. Robb last week responded to the protests and asked that the provisions be deleted from a comprehensive elections law.

"This indisputably runs against the spirit and philosophy of the First Amendment guarantees of free speech," said Sen. Joseph V. Gartlan, (D-Fairfax), speaking today against the libel measure. "If this were to be taken to court, it would be held unconstitutional."

Supporters, led by chief sponsor Del. Floyd C. Bagley (D-Prince William) made a last-ditch effort to salvage the proposal. Charging that the First Amendment did not guarantee "the right to lie," Bagley bitterly criticized newspapers for contending that the measure was aimed at protecting House incumbents in this fall's elections.

"This protects not ourselves, but the people," said Bagley. "It's my intent to protect the general public from the election to this office or any other office of people who use fraud and deceit."

Bagley found a key supporter in Del. Theodore V. Morrison, (D-Newport News), a close ally of the House leadership, who decried opponents for invoking Thomas Jefferson's defense of free speech. "Nobody ever cites Jefferson's views on property or on chattel slavery," he said. "I don't think that in this day and time we can relate to 18th century practices."

Morrison also argued that, contrary to opponents' claims, there were numerous restrictions on free speech already in the state criminal code, including a law banning "grossly insulting language to any female of good character" and a law prohibiting false advertising relating to the sale of cattle or bulls. "It seems to me that those who produce the bull should be protected as much as the bull itself," he said.

The libel measure had been introduced by Bagley because of his anger about a Republican "green sheet" circulated during his reelection campaign that he claimed contained a "pack of lies" about his legislative record. Bagley said there was "no question" that he would have had the votes to defeat Robb's request and uphold his bill today had it not been for a ruling by Speaker A.L. Philpott (D-Philpott.)

He held that Robb's request to delete the criminal libel provision and another proposal setting a new date for a primary in Portsmouth constituted one amendment to the elections law and had to be voted on jointly. Because the Portsmouth primary was noncontroversial, Bagley said few delegates were willing to vote with him. His bill died by votes of 73-to-23 in the House and 36-to-2 in the Senate.

"I got trapped by the rules," Bagley said. But the 60-year-old lawmaker vowed to come back next year and reintroduce the bill.