A U.S. Court of Appeals panel here upheld yesterday the criminal conviction of U.S. Rep. Charles C. Diggs Jr. (D-Mich.) on charges of mail fraud and illegal diversion of more than $60,000 of his congressional employes' salary to pay his personal and congressional bills.

Diggs was convicted by a federal jury here in October 1978 and sentenced by U.S. District Judge oliver Gasch to three years in prison. Diggs, the senior black member of Congress, has remained free on bond pending his appeal.

Diggs, who was censured by the House of Representatives in August for taking the salary kickbacks from his staff, now can either ask the full U.S. Court of Appeals here for a further hearing or appeal directly to the U.S. Supreme Court. A spokesman in his office made no immediate statement yesterday about his plans.

The appeals court panel voted 2 to 1 yesterday to affirm Diggs' conviction, noting in its majority opinion that Diggs "defrauded the public of not only substantial sums of money but of his faithful and honest services."

U.S. Circuit Judge Malcolm R. Wilkey, who wrote the majority opinion for himself and U.S. District Judge Louis Oberdorfer, rejected all the congressman's arguments that he acted within the bounds of his discretion to set the duties and salaries of his congressional employes.

Diggs had argued that his employes had voluntarily paid bills and that their salaries were for them to use as they wished. He added that it was proper for House funds to be used for a wide range of purposes in connection with a congressman's "official and representative duties."

"We disagree," Wilkey wrote. "The defendant's argument erroneously equates a congressman's discretion to define the duties of an employe with the unfettered power to divert monies intended for one purpose to another, completely unauthorized purpose."

U.S. Circuit Judge Harold H. Leventhal said he would have reversed the conviction because the prosecution improperly commingled allegations that Diggs used government money to pay both personal and congressional expenses.

He said the situations were "quite different," and that the jury should have been instructed that Diggs might have had a legitimate "good faith" defense that he thought it was legal to use the money for purely congessional expenses.

Even that might have violated House rules, but "what is shenanigans, bad taste and borderline is not the same as what is criminal," Leventhal said. b

Diggs, who was chairman of the House District Committee and the International Relations subcommittee on Africa, was reelected to Congress last year after his conviction. The case against him involved allegations that five of his former and present employes were given pay raises and forced to pay him kickbacks or pay his bills.