A Virginia legislative panel, fueling an already divisive debate over ethics, voted today to exempt members of the General Assembly from criminal prosecution for violating a major provision of the state's conflict-of-interest law.

The proposal was one of several sweeping changes recommended by a subcommittee in reaction to an interpretation by the state attorney general's office of a Virginia Supreme Court ruling. That opinion has disrupted the General Assembly as members have abstained from voting on issues they feared would be considered conflicts.

The state attorney general said today the ruling raises questions of whether the legislature can "carry out its normal business" without violating the conflict-of-interest law.

The proposed revisions to the law would set a different standard for prosecuting legislators than for prosecuting other state and local officials under the conflict law.

Del. Theodore V. Morrison Jr. (D-Newport News), who drafted the proposal, justified the change, saying, "It's not fair to have people so paranoid about their votes."

Morrison's proposal would leave disciplinary action on many questions of conflicts to advisory ethics panels of the House and Senate. The proposal leaves intact a provision of the law that provides for criminal prosecution on charges such as bribery.

House Speaker A.L. Philpott (D-Henry) said today he would not let the House vote on the state's $18.5 billion biennial budget until the ethics issue is resolved. Philpott said he supports the removal of criminal sanctions.

But the change in criminal prosecution proposed by the House subcommittee on standards of conduct drew immediate criticism from some lawmakers.

"I think that would take it out of the judicial arena and put it in the political arena," said state Sen. Wiley F. Mitchell Jr. (R-Alexandria). "I think we've got a pretty good enforcement system."

Under Morrison's proposal, state Sen. Peter K. Babalas (D-Norfolk) could not have been prosecuted for some of the conflict violations for which he is facing criminal charges. Babalas, the fourth-ranking member of the Senate, has been charged with voting to kill legislation that would have imposed tighter restrictions on second-mortgage companies, including one that paid him $61,000 in legal fees.

The criminal prosecution issue adds a new element to a legislature already struggling with the impact of the attorney general's opinion and the Babalas case. In past days, lawmakers in record numbers have abstained on dozens of issues and committee chairmen have been holding back major bills.

Sen. Joseph V. Gartlan Jr. (D-Fairfax) said he was surprised by the House action. "I think the draft of that bill is an overreaction," he said. "We need to do something . . . but it's not necessary to go through any wholesale revision of the act."

The ethics controversy was heightened this week by the attorney general's seemingly contradictory interpretations of a 1984 state Supreme Court ruling that broadened the impact of Virginia's conflict law.

Attorney General Mary Sue Terry released a memorandum that said the ruling requires legislators to abstain on issues in which their personal interest is different from that of the public at large. That means, for example, a legislator who is a public school teacher may not vote on the state budget, which includes funds for education, the memorandum said.

The memorandum said the ruling was "very broad . . . [and] went beyond the original intent of the General Assembly."

Prior to the ruling, lawmakers considered it acceptable to vote on measures affecting their professions or businesses in general, but unacceptable to vote on those that directly affect them or their families.

The panel's revisions, which are scheduled to be debated Friday by the House Privileges and Elections Committee, essentially would change the law back to what the legislature originally intended in 1983 when it passed the first conflict law to affect the legislators.

The Supreme Court decision involved a Richmond case in which Mayor Roy A. West, who also serves as a member of the City Council, was barred from voting on the selection of a new school superintendent because West was a school principal.

Morrison bristled today at suggestions that the lawmakers' action may be seen as an opportunistic attempt to ease the conflict law.

"I think it's an incorrect interpretation," he said, adding it would be wrong to think legislators have "no more sense of ethics and decency than that."

Del. Lewis W. Parker Jr. (D-Mecklenburg), chairman of the panel, declared, "I don't know anyone down here who knowingly or willingly will advance himself."