In the summer of 1983, El Salvador's government signed a contract with a little-known Virginia company to buy 19 million rounds of ammunition for use in the country's war against leftist guerrillas.

The purchase, part of a long list of Salvadoran armaments financed by U.S. military aid loans, seemed ordinary enough for a government caught up in a four-year-old civil conflict that the Reagan administration regards as vital to American interests.

But it has sparked investigations in both countries concerning alleged improper payments to Salvadoran officials, questionable contract procedures and defective supplies.

Moreover, it has raised broader questions about how the Salvadoran Army and its U.S. advisers handle a military aid program that has more than doubled, to almost $200 million, in the past year. It also suggests basic weaknesses in a vast Pentagon procurement system that allowed U.S. funds for a Central American ally to wind up in an Eastern European country.

Soon after the first deliveries last spring, Salvadoran troops in the field found that the new bullets caused their M16 rifles to jam, according to U.S. and Salvadoran officials.

Federal investigators have determined that much of the ammunition supplied by Nordac Manufacturing Corp. of Fredericksburg, Va., was defective. More significantly, according to shipping and licensing documents first obtained by The Fredericksburg Free-Lance Star, the bullets -- which Nordac had told authorities were U.S.-made, as required by federal law -- actually were imported from Yugoslavia.

Federal law enforcement sources said the Justice Department is investigating allegations that Nordac intended to make up to $450,000 in improper payments in connection with the contract, and that part of the money was intended for Salvadoran military officials.

Former Nordac employes closely familiar with the firm's operations said they have told federal prosecutors that they believe the company had planned to make such payments, but ended up making only a portion of the payments.

The former employes, some of whom have been in disputes with Nordac, said they have told prosecutors that the company was in a position to make the payments because it stood to earn more than $1 million on the $4.7 million contract. The former employes spoke on condition that they not be identified.

Nordac President John P. Straiton IV said Nordac made no improper payments in connection with the contract and that the bullets were not defective, according to his attorney, Plato Cacheris. "He's denied emphatically that any bribes were paid, and says the ammunition was of good quality," Cacheris said.

Cacheris said he could not comment on the origin of the ammunition. Straiton would not agree to an interview.

The Nordac contract marked a new role for El Salvador's six-member buying commission, which negotiated the deal. It was the first time the Salvadorans had arranged a major arms purchase directly with an American firm, according to Salvadoran sources. Previously, all such transactions were made through the Pentagon, with Pentagon officials actually ordering the materials and selling them to the Salvadorans.

No U.S. or Salvadoran official who was asked to comment on the Nordac case on the record would do so, saying the contract is under investigation by the Justice and the Defense departments. But the probes have shed light on a Foreign Military Sales program that generally receives little public scrutiny.

For example:

*U.S. military advisers in El Salvador gave their approval to the contract with Nordac, a relatively obscure middleman supplier, according to Salvadoran military sources. At the time, U.S. officials acknowledge, the company was $126,000 in debt to the Pentagon on a previous contract that ended in default and only recently had agreed to repay the money.

The U.S. Military Group in El Salvador participates in all decisions about what military supplies El Salvador should buy with U.S. loans, and the Salvadorans always heed their advice, according to U.S. and Salvadoran sources. In some cases, they say, members of the "Mil Group," as it is known, have accompanied Salvadorans on U.S. factory tours and recommended certain suppliers over others.

*The U.S. attorney's office in Alexandria is examining company receipts and records showing that Nordac paid more than $300,000 -- some of it in cash -- to Louisiana businessman John Fodor, who is alleged to have helped the company win the contract, according to informed sources.

Former Nordac employes said they have told prosecutors that Fodor frequently discussed the contract with Salvadoran military officials, and that they believe much of the payments were commissions for Fodor and that part was intended for Salvadoran officials. Investigators are looking into whether Nordac violated a contract provision that barred the company from using federal money -- under the U.S. assistance loan to El Salvador -- to pay more than $50,000 in commissions.

Cacheris said Straiton says that Fodor played no role in the ammunition contract, and that Nordac's payments to Fodor "were for a joint venture in a factory that is being built in El Salvador."

The former employes said Nordac had plans to build a factory, but that they never reached fruition and do not explain the large payments to Fodor. One former employe said he told prosecutors that after the investigation began last spring, Straiton and Fodor discussed using the proposed factory as a way to explain the large payments to Fodor.

Fodor, who is a Hungarian emigrant married to a Salvadoran and who operates a variety store in San Salvador, would not agree to be interviewed.

*The State Department granted Nordac an export license last September for the unusually large shipment of ammunition, which had to be certified as U.S.-made. But State Department officials, following their usual practice, did not check with the Treasury Department, which nine months earlier had licensed Nordac to import a comparable amount of the same kinds of ammunition from Yugoslavia.

*The Salvadorans turned to the private market partly out of frustration with the Pentagon bureaucracy, which officials from both countries say can be painfully slow to deliver military supplies. Foreign allies also must pay far higher prices for equipment ordered through the Pentagon than they would for commercial purchases.

*Four days after the Nordac deal was closed, El Salvador's buying commission agreed to a $900,000 contract with an obscure Illinois company for 2,000 rifles that the contract described as equivalent to the Colt M16. The contract was canceled after settlement of a civil suit brought by Colt Industries, which alleged that the rival firm, Springfield Armory, improperly offered to sell a cheaper version of the M16 made with foreign parts and pirated technical drawings. The M16 "lookalikes" were to be financed with U.S. military credits.

Although U.S. military assistance comes in the form of loans that must be repaid, El Salvador, like many foreign allies, long did its business directly with the Pentagon, which would place the orders and deliver the goods. The 66-member team at the U.S. Embassy advises, trains and funnels U.S. equipment to the Salvadoran Army.

"If the Salvadorans were way out of line, we'd tell them so," a top U.S. military official said of equipment purchases. "We never had a case where they went against our advice."

"The Americans say, 'This is the best,' " a senior Salvadoran defense official agreed. "We don't have the option to choose what's best."

But while the United States would guarantee the quality of the supplies, the Salvadorans decided they no longer could tolerate the Pentagon's long delays and top-dollar prices.

"You give your order and stand in line behind the Lebanese and everyone else, waiting with hat in hand for the system to cough this stuff up," said Col. John Waghelstein, former commander of the Mil Group in El Salvador. As a result, he said, "a lot of pressure was being put on the Salvadorans by salesmen coming there. I had salesmen in my office, beating on my desk, trying to get me to support their pitch."

When the Salvadorans decided to try negotiating directly with U.S. suppliers, the task fell to the procurement commission, whose senior members were Col. Elmer Gonzalez Araujo, an Army staff officer, and Col. Jorge Rivera, the Defense Ministry's finance chief.

In the same period, according to former Nordac employes, Straiton and businessman Fodor made several trips to that country and met with Salvadoran military officials.

When the Salvadorans decided to buy ammunition, they did not turn to such established firms as Remington Arms or Winchester Group. A spokesman for Winchester, which had supplied El Salvador in the past, said the firm was never asked to submit a formal bid for the ammunition.

Instead, according to Salvadoran sources, the commission accepted bids from Nordac, Springfield Armory and three other small U.S. firms. All are said to be middlemen or distributors, not manufacturers. Salvadoran officials could not explain why no other companies bid, especially since the made-in-America rule -- established for both commercial and quality-control reasons -- would require any middleman to find a U.S. supplier.

The commission selected Nordac's bid for 15 million rounds of 5.56-mm and 4 million rounds of 7.62-mm ammunition, along with 15,000 ponchos, 21,000 pairs of combat boots, 10,000 field packs, and 6,000 pairs of suspenders.

Gen. Rafael Flores Lima, then the Salvadoran Army chief of staff and now deputy defense minister, directed his military attache in Washington to sign the Nordac contract, sources said. But they said the attache argued that the price was too high, especially since his office previously had obtained a price quotation from Winchester that was as much as $1 million less.

The military attache then notified Flores Lima, who expressed surprise and agreed to delay the Nordac contract, the sources said. But they said that days later, Flores Lima ordered the attache to close the Nordac deal, saying he had determined that Winchester's price did not include shipping costs and therefore was no better than Nordac's.

Former employes, however, said that Nordac never intended its bid to include shipping costs to El Salvador, but that it is not clear if the Salvadorans knew this. As it turned out, Nordac had trouble paying the cost of shipping the supplies on a small Florida charter airline and, according to sources, later presented the Salvadorans with an additional $240,000 bill for freight, which Gonzalez Araujo then agreed in writing to pay.

Salvadoran sources said the Mil Group also recommended that the ammunition be bought from Nordac. U.S. and Salvadoran military sources said that the principal Mil Group officer in charge of such purchases was Army Lt. Col. John Lopez, then the U.S. Embassy's chief logistics officer. Lopez, now based in Panama, would not agree to be interviewed.

The two-page contract was signed July 15, 1983. The last clause said: "The goods shall be manufactured in the United States of America."

Later that month, Nordac promised not to pay commissions over $50,000 in signing a parallel contract with the U.S. Defense Security Assistance Agency. But Pentagon officials never inspected the shipments.

A Pentagon spokesman, Col. Don Brownlee, said such sales are viewed as a matter between the foreign government and the private supplier. "If the goods are delivered and the receiver of the goods complains, then an investigation takes place," he said. "No one is going to open every single box and every piece of equipment that goes through."

With a single wire transfer in July, the Pentagon deposited $4.7 million in Nordac's account at the Bank of Virginia. After years as a small military surplus company, Nordac had "hit the jackpot," a former employe commented.

Nordac earlier had won a 1979 Pentagon contract to provide 372,000 canteen covers. Pentagon officials, however, said the company failed to deliver about half the covers, defaulted on the contract and ended up owing the government $126,000. Although Nordac later obtained a $500,000 loan from the Small Business Administration to help pay its debts, officials said the company did not reach a long-term repayment agreement with the Pentagon until shortly before it signed the ammunition deal.

Having won the big contract, Straiton faced a new problem, according to former employes. They said he was under continuous pressure from El Salvador to deliver the ammunition, but had managed to buy only about 1 million rounds of Winchester bullets from retail outlets. Straiton told colleagues he believed that some U.S. firms were refusing to sell to him for competitive reasons, and Nordac considered buying its own ammunition factory, the sources said.

After touring facilities in Britain and Portugal, sources said, Straiton visited a Yugoslav firm that later agreed to sell him the ammunition for far less than he was charging the Salvadorans.

The next part of the ammunition trail can be traced in documents obtained by Fredericksburg Free-Lance Star reporter Rick Pullen and made available to The Washington Post.

On Sept. 15, 1983, Nordac obtained a State Department license to export ammunition to El Salvador. In the space where it had to list the manufacturer, the company reported: "Winchester -- New."

John Falk, a spokesman for Winchester's parent firm, Olin Corp., said Winchester neither supplied nor discussed supplying any ammunition to Nordac. Shipping documents show that Nordac imported 5.56-mm and 7.62-mm ammunition from Yugoslavia.

The Yugoslav ammunition arrived by ship at the Baltimore port. According to sources, Nordac repackaged the ammunition in Fredericksburg and stamped it with the letters AAC -- American Armaments Corp., a Nordac subsidiary -- which made it appear U.S.-made.

Nordac declared the huge Yugoslav purchase on an import license issued by Treasury's Bureau of Alcohol, Tobacco and Firearms. Bureau official Carmen Alston said that ammunition exports are the State Department's responsibility, and that "they would cross-check with us only if there was a problem."

Joseph P. Smaldone, the State Department's chief of arms licensing, said his department does not check on Treasury imports or whether applicants are supposed to be providing U.S.-made goods. "That would be a matter for the U.S. company to straighten out with the Defense Department," he said.

Soon after most of the Nordac ammunition was delivered in February and March, the Salvadoran Army complained to the Mil Group that their guns were jamming. Col. Domingo Monterrosa, a brigade commander, said the rifles could not be fired on automatic because the ammunition had a deficient powder charge.

The Mil Group made a brief inquiry, but decided the problem was nothing more than the usual rate of faulty ammunition, Salvadoran military sources said.

In July, Monterrosa complained to Gen. John W. Vessey Jr., chairman of the Joint Chiefs of Staff, who was on an official visit to El Salvador. Civilian investigators were sent to El Salvador, and U.S. officials said they found much of the ammunition defective.

News of the grand jury probe surfaced last spring during a bitter divorce between Straiton and his wife and business partner, Darlene, who later became engaged to Straiton's former accountant. The divorce action eventually led to Straiton's sole ownership of the firm, and federal investigators are trying to separate hard evidence from the personal disputes.

Sources said the investigators are focusing on how Nordac won the contract, the origin and quality of the ammunition, the alleged improper payments and Nordac's relationship with Salvadoran military officials.

The sources said investigators are questioning whether part or all of the more than $300,000 that Nordac paid Fodor was for commissions on the ammunition sale, and whether more than $50,000 was paid from federal funds. They also are questioning why some payments to Fodor as large as $30,000 were made in cash, sources said.

The former employes said they told prosecutors that Straiton did not specifically explain the payments when the subject was raised at the time, and that some of the money came from a bank account containing the federal loan money. They also said they have told prosecutors that they heard Straiton talk of offering jobs to Rivera and Gonzalez Araujo after the colonels retired from the Salvadoran military.