The trial of former state department official Walter Reed Martindale III, who is charged with plotting to assassinate a flamboyant Saudi sheik, opened yesterday with the outline of an alleged conspiracy between old military buddies that unraveled when one partner backed out.

The case against Martindale, who was indicted in July on a charge of masterminding the alleged plot, is largely based on yesterday's testimony by a man who prosecutors say helped plan an aborted kidnaping and assassination of sheik Mohammed Fassi, a member of the Saudi royal family.

Scott Goodman, the government's key witness, testified yesterday in U.S. District Court in Alexandria that Martindale approached him early last year about the killing. "He told me that one of his associates had asked him to assist and or to arrange a contract killing of an Arab who lived in London," Goodman said.

During nearly two hours of testimony, Goodman detailed how Martindale asked him to obtain a gun and how the two traveled to London, where they conducted surveillance of Fassi's home.

Assistant U.S. Attorney Justin Williams said Goodman backed out of the plot when he realized "the thing had actually proceeded this far."

Meanwhile, defense attorneys accused the government of weaving a tale that is "fantastic, unbelievable and not true." The charges against Martindale are based on a series of misconceptions and misunderstood conversations, defense attorney Paul Kramer told the court.

During opening statements, Kramer said that instead of planning a murder, Martindale, the head of a Washington trade firm, was working out the details of a major business proposal to provide security for rich Arabs. The government is trying to "weave these facts together to prove a conspiracy so fantastic, so incredible that it boggles the mind," Kramer told the court.

The case has shocked Martindale's family and friends, who depict him as a dedicated government official, heroic in his efforts to help refugees in Vietnam. Martindale, a bachelor who lives in the Hollin Hills section of Fairfax County, adopted two Vietnamese orphans.

Martindale, 41, was arrested in London Oct. 25, 1983, and was convicted of carrying a semiautomatic submachine gun through London's Gatwick Airport. Defense attorneys said yesterday that Martindale had obtained the gun as a gift for an Arab business associate.

In court yesterday, Martindale, in a gray, pin-stripe suit and a gold bangle bracelet, handed notes to his attorney even as Kramer questioned witnesses from the podium. Martindale's parents sat quietly behind him in the courtroom throughout the day. Part of the government's case rests on the the testimony of a former Vietnamese military official who said Martindale approached him in London a year ago about a murder plot.

Speaking through an interpreter yesterday, Nguyen Phuc said Martindale told him he was planning to open a business in London and was recruiting Vietnamese. He said Martindale asked him to follow certain Arabs. Phuc testified yesterday that during their conversations, Martindale "said the word 'kidnap'; I heard the word kidnap . . . . "

Defense attorneys have said Phuc's recollections of meetings with Martindale are skewed because of language barriers.

Goodman and Martindale met in 1971 when they were U.S. advisers in Vietnam, according to yesterday's testimony. Martindale helped get Goodman's daughter and the child's mother out of that war-torn country, Goodman testified yesterday, and Goodman said that he got involved with the plot "because of friendship and because I owed him so much."

Goodman, who has been promised full immunity for his testimony, said he intended to participate only in the planning of the alleged assasination and planned to accept no money for it.