A federal judge in Alexandria yesterday dismissed an indictment charging fraud against Litton Industries, ruling that U.S. prosecutors abused the grand jury system in threatening Litton with the indictment if the company did not agree to government proposals.

The order of U.S. District Court Judge Albert V. Bryan Jr. also prohibits prosecutors from reindicting Litton on the charge because prosecutional discretion (was) abused.

Litton, a major defense contractor, was indicated April 6 on a charge of fraudulently overcharging the Navy $37 million for building three nuclear attack submarines between 1968 and 1971.

This indictment came after an attempt to indict Litton in 1975 failed when the the term of the special grand jury called in March of that year solely to investigate Litton expired.

But in April, 1976, the Armed Services Board of Contract Appeals awarded a $17.3 million judgement to Litton from the Navy in connection with the contract.

Byran said in his opinion that after the 1975 attempt to indict Litton failed, prosecutors, in an attempt to get the award revised, continued to threaten to indict Litton if it did not agree to reopen the appeals board proceedings.

"What is reprehensible here is the threat to use, as well as the actual use of the grand jury as a brgaining tool in an effort to upset the final civil award to which Litton was entitled," Bryan said.

Prosecutors also had two FBI agents summarize evidence to the April 6 grand jury rather than formally present information and witnesses as in the previous grand jury, which did not indict Litton, Bryan said.

"This is further evidence of the cynical view that has been taken of the grand jury in this case, namely, as a mere echo of the office of the U.S. attorney," Bryan said.

"I think the court misread our action," said U.S. Attorney William B. Cummings, who, with the Justice Department, headed the two-year investigation of Litton.

Bryan"assumed that there were motivations, a desire on ou part to get this thing back to the [appeals] board and use the grand jury to bludgen them. Nothing could be further from the truth," Cummings said.