A Virginia Senate panel, reacting to a voting incident involving one of its members, proposed sharp changes today in ethics rules to limit lawmakers' authority to cast proxy votes at hearings they do not attend.

The subcommittee also announced its own proposals for changing the state's conflict-of-interest law and attacked a House bill on the issue as "decriminalization" of conflict violations for legislators.

The measures are part of a heated controversy that has dominated this year's session of the General Assembly.

A subcomittee of the Senate Rules Committee rejected one proposal to ban proxy voting, but accepted another placing restrictions on when senators may cast proxy votes.

"The system we've got now is unacceptable," Sen. Wiley F. Mitchell Jr. (R-Alexandria), who wrote the resolution to restrict proxy voting, told the Rules Committee. "It's abused."

Concern over proxy voting was sparked by the pending prosecution of Sen. Peter K. Babalas (D-Norfolk) on conflict charges. The allegations involve his successful effort to kill a bill last year that would have placed restrictions on second-mortgage companies, including one that paid him $61,000 in legal fees.

Babalas, a member of the Rules Committee and the Senate's fourth-ranked member, cast the proxy votes of two senators against the bill.

Under existing rules, senators may allow their colleagues to cast unlimited proxies for them in committee hearings without specifying how they should be voted. Mitchell's resolution would allow a proxy to be cast only if a senator instructs the colleague precisely how the vote should be cast.

Sen. Dudley J. Emick Jr. (D-Botetourt) argued in favor of eliminating proxy votes, asking, "Isn't the real purpose of having proxies to look good for our voters back home?"

The Rules Committee is scheduled to vote on the proxy issue at its Friday meeting.

In another ethics matter, the committee voted to submit its proposed revisions in the state's conflict law to another Senate panel charged with rewriting the conflict legislation.

While the Senate committee endorsed modifying the existing law, it vehemently opposed a House proposal to exempt legislators from criminal prosecution for violating some sections of the statute.

"The same rule should be applied to members of the General Assembly as well as local government officials," said subcommittee Chairman Howard P. Anderson (D-Halifax).

But a divided subcommittee then recommended changes in the law that would dilute a 1984 state Supreme Court ruling prohibiting legislators from voting on any matter in which they have a "personal interest."

The law defines "personal interest" as any profession or business in which a legislator holds 3 percent ownership or from which he receives more than $10,000 a year in income.

The Senate proposal, like the House version, would give legislators far more latitude in voting on issues affecting businesses or professions in which they are involved.