The Maryland Board of Public Works, reacting to reports that a federal highway bid-rigging investigation will soon produce a spate of indictments in the state, adopted broad new regulations today that will allow the state to punish convicted firms by canceling ongoing contracts and prohibiting them from bidding on state contracts for up to five years.

The action came just two days after Donald A. Kary, the head of a Baltimore paving company, admitted at a disciplinary hearing before the state Department of Transportation that his and other companies had regularly participated in rigging state highway contracts instead of competing against each other for the work. And last June, the head of another Baltimore paving company, E. Stewart Mitchell, plead guilty to Justice Department bid-rigging charges and served five months in prison.

Those cases, combined with reports that investigations by a federal grand jury in Baltimore and the state attorney general's office will soon produce new charges, prompted concern for the "integrity of the state's procurement process" and led the Board of Public Works to convene in emergency session today to adopt the new regulations.

"Debarment disqualifying a firm from state contracts is capital punishment for a highway contracting firm since so much of that kind of work is from state contracts," said Wayne McDaniel, an aide to Gov. Harry Hughes. "The idea is not just to punish but to protect the integrity of the contract bidding process in the state."

Adoption of the new regulations by the board, which is composed of Hughes, Comptroller Louis L. Goldstein and Treasurer William S. James, must be ratified by a joint committee of the legislature, an action that is expected sometime next week.

Several other states, including Virginia, adopted similar debarment regulations after learning of the federal investigation into bid rigging, which began in Tennessee in 1979 and has expanded to 18 other states, including Maryland. According to investigators, the bid rigging does not include state officials.

Kary, who testified this week that bid rigging was "the way everbody in the state did business," has been helping the Baltimore federal grand jury in its criminal prosecutions, according to sources, and has agreed to provide the attorney general's office with the names of other contractors involved in bid rigging.

The attorney general's office, which is pursuing civil penalties against bid riggers, filed an antitrust lawsuit against Kary and Donald M. Nichols Jr. of Delmar, who together ran the American Paving Corp. The lawsuit charges that Kary, Nichols and other unnamed coconspirators divided up contracts for paving and materials among themselves in "noncompetitive, collusive and rigged bids" to the state.

The Justice Department investigation, the largest criminal antitrust investigation ever conducted, has resulted in the convictions of 135 companies and 155 individuals. In several states, including North Carolina and Virginia, federal investigators have expanded their investigation to bid rigging in electrical and water and sewer contracts.

According to Jerome W. Klasmeier, chairman of Maryland's Procurement Advisory Council, which developed the debarment regulations, the new measures were pushed through on an emergency basis because of "the fact that we expect the Justice Department to be coming down with some indictments on some contractors" who do business with the state.

The new regulations, which apply to all major agencies that contract out for services, will allow the state to take a variety of actions against any contractor convicted of a variety of state or federal offenses, including illegally obtaining or trying to obtain or performing a public or private contract; violation of antitrust statues, or being held liable in civil proceedings for irregularities in connection with the submission of bids.

The strongest action available to the state will be for the Board of Public Works to disqualify for as long as five years a firm or person from competing for state contracts.

However, in an effort to encourage businesses involved in bid rigging to come forward and aid investigators, the regulations allow the attorney general's office to work out a lesser punishment for recommendation to the board.

The board may also suspend a firm for an indefinite time, terminate any existing contracts, and disqualify a suspended or debarred business from performing as a subcontractor on state contracts, or providing supplies for a contract.

"The idea is to strike the right balance between protecting the integrity of the state bidding process by punishing people who cheat and encouraging people who know about wrongdoing to come forward," said Attorney General Stephen H. Sachs, whose office helped formulate the new rules. "You also want enough flexibility so that you don't put everyone who may have been involved out of business and face a situation where no roads are getting built."

In addition, Sachs said, debarment is only one of the punishments meted out to the firms. Most will face criminal penalties, including jail terms, and civil penalties, such as fines and restitution. In Kary's case, for instance, his attorney said the contractor expects shortly to face criminal charges that include a $100,000 fine and two months in Allenwood federal prison. In addition, Kary has agreed to pay $200,000 in restitution and damages as part of an out-of-court settlement with Sachs's office.