Virginia's acting attorney general, William G. Broaddus, announced today he will initiate criminal prosecution of state Sen. Peter K. Babalas on charges that he violated the state's conflict-of-interest law, the first time a sitting legislator in Virginia has been charged with such an offense.

The attorney general's action came a day after a Senate ethics panel said it found that Babalas, a Norfolk lawyer and the fourth-ranking member of the Senate, "willfully" violated two sections of the law and referred the case to Broaddus for action.

"I intend to fight it and I intend to take my seat Wednesday," when the General Assembly's 1986 session begins, the 63-year-old Babalas, a Democrat, said today.

He said he rejected the panel's conclusion that he broke the law by voting to kill legislation that would have imposed an interest rates ceiling on second-mortgage loans made by one of his clients, a now-bankrupt Virginia Beach lender.

The senator will plead not guilty to the charges, Wayne Lustig, his lawyer, said today. "The presumption of innocence follows him not only into the courtroom, but into the legislative halls of Virginia."

Broaddus' action came four days before he leaves office and removed a sensitive political issue from the agenda that would have confronted Mary Sue Terry, a Democratic legislative colleague of Babalas, who begins a four-year term as attorney general Saturday.

The decision to prosecute Babalas in Richmond Circuit Court quickly filtered through the halls of the state Capitol today, dampening the mood of legislators arriving for the 60-day session. "When one of us is involved . . . it puts a cloud over all of us," said House Republican Minority Leader Raymond R. Guest Jr. of Warren County.

Babalas has maintained he did nothing wrong in acting as an attorney for Landbank Equity Corp. and casting his vote and the proxies of two other legislators to kill legislation regulating the second-mortgage industry in Virginia. In a one-year period, Babalas received more than $61,000 from the second-mortgage company.

"Taken as a whole, the record supports a finding that there is a reasonable basis to conclude that Senator Babalas accepted money for services involving his position as a senator, that he used his position as a senator to benefit his client, that his fees for services to Landbank covered his use of his legislative position on Landbank's behalf," the panel said in its 32-page report.

Broaddus said he agreed with that conclusion and his office will pursue charges that Babalas violated the section of the law prohibiting officials from voting on issues in which they have a personal interest, as well as allegations that he accepted a "professional opportunity" knowing "there is a probability that the opportunity is being afforded him with intent to influence his conduct in the performance of his official duties."

The five-term legislator could be removed from office in addition to being fined up to $1,000 and sentenced to a maximum jail term of one year on each of the two charges.

Lustig described the attorney general's actions as "ill advised." He said Babalas will request a jury trial and expects the case to be heard in April.

Under Virginia law, Babalas is immune from standing trial while the legislature is in session. The Senate has the power to take its own action in the matter and to sanction or dismiss a member if it determines a member has violated Senate rules, but no senator has suggested that the Senate may take such an action.

Some officials, including Republican former state attorney general J. Marshall Coleman, the GOP's 1981 gubernatorial nominee, have called for Babalas to step aside until the case is settled.

Babalas, a member of the legislature since 1968, is not the only legislator facing controversy as the session opens.

Sen. Robert E. Russell, a suburban Richmond Republican, has come under fire because he failed to list income from a business he set up to receive consulting fees from GOP candidate Wyatt B. Durrette's campaign for governor on his financial disclosure report.

In another case, a Democratic prosecutor has been criticized for dropping drunk-driving charges against Sen. Richard Holland, a Democrat from Isle of Wight County in Southside Virginia.