Sen. William Proxmire (D-Wis.) released memos yesterday showing the Justice Department killed a criminal investigation into allegations of a multimillion-dollar fraud by Newport News Shipbuilding and Dry Dock Co., even though some of the department's lawyers said they had uncovered "conspiracy . . . staggering in its size and complexity."

The memos, involving shipyard claims against the government for $894 million in alleged cost overruns, originated in the office of U.S. Attorney Elsie Munsell of Alexandria, a presidential appointee now under consideration for a federal judgeship in Virginia.

In a strongly worded May 18, 1983, memo calling for indictment of the shipyard, Munsell and three assistants compared the shipyard's claim to "a huge field of oil lying just beneath the surface."

"Wherever prosecuters probed, evidence of fraud bubbled to the surface," they wrote D. Lowell Jensen, chief of the Justice Department's criminal division.

Three months later, however, Jensen decided no prosecution was warranted and ended a five-year investigation of Newport News, Virginia's largest private employer, Proxmire told a Joint Economic subcommittee hearing.

Stephen Trott, who succeeded Jensen as head of Justice's criminal division, told the committee yesterday he could not make criminal investigative materials available under present law. He suggested a "friendly lawsuit" to obtain court guidance that might allow their release.

Then, "at the very least . . . you will understand the reasoning of the Justice Department in not bringing the case to prosecution." He said Jenson had told him evidence of "criminal intent" to defraud the government was lacking.

Proxmire said the limited Justice Department files released to date indicate the department "mismanaged its part of the investigation and allowed it to languish from inattention for long periods before finally killing it."

A report from Proxmire's staff charged that prosecutors were repeatedly shuffled onto and off the case, which was finally left in the hands of an assistant U.S. attorney with "no experience in complex criminal investigations."

Proxmire has been leading an investigation of overrun claims of nearly $1.8 billion made by three Navy shipbuilders between 1968 and 1977. Those made by Newport News Shipbuilding involve alleged cost overruns of $894 million in construction of seven nuclear submarines, five cruisers and two aircraft carriers. Those claims were settled for $208 million in February 1978.

A 1981 memo on those claims by the U.S. attorney's office in Alexandria said "it is clear beyond cavil that the individual claims analyzed above are not only false and without legal merit, but that their preparation was purposeful and criminal . . . . The conspiracy we have uncovered is staggering in its size and complexity."

Another, sent by the same office to Jensen two years later, said, "We are still convinced that there is a prosecutable case against the company, and that an indictment could be put together" before the statute of limitations bars criminal action against the shipyard.

The Joint Economic subcommittee has been trying to obtain Justice Department files in the case, and its chairman, Sen. Charles Grassley (R-Iowa), threatened to subpoena the documents if they are not forthcoming.