Labor Secretary Raymond J. Donovan and his co-defendants in a New York fraud and larceny case yesterday asked a state judge to dismiss the charges against them because of what they said was widespread misconduct by prosecutors and lack of evidence of any crime.

In a scathing, 139-page motion, defense lawyers accused prosecutors of creating a "baseless, sinister fantasy" predicated on faulty legal theories, procedural flaws, "willful misconduct" and "absolute falsehood."

The defendants charged that Bronx District Attorney Mario Merola improperly linked the charges against them to a separate murder case, thus portraying Donovan and the others "as part of a mobster milieu."

The group said Merola also prejudiced the case and violated rules of prosecutorial conduct by making "highly inflammatory and irrelevant allegations" at a news conference he held in October to explain the charges.

Merola's office said yesterday that he would have no comment.

The defense motion urged Justice John P. Collins of state Supreme Court in the Bronx to dismiss the charges because of 11 major flaws, including improper conduct by prosecutors, errors in grand jury procedures, absence of any crime and lack of jurisdiction. Collins is to hold a hearing on dismissal of charges after the state responds to the motion.

In New York, the Supreme Court is a lower-level trial court.

Donovan filed a separate, 39-page dismissal motion yesterday, saying there was "a total absence of evidence" linking him to any crime.

Donovan, former executive vice president of Schiavone Construction Co. of Secaucus, N.J., is charged with conspiring to pad payments to a minority subcontractor on a $186 million subway project in 1979 and 1980.

Donovan resigned his Schiavone post to become labor secretary in 1981 but continues to be a principal owner of the company. He is on leave from his Cabinet job until the charges are resolved.

In 1982, special prosecutor Leon Silverman investigated alleged ties between Donovan and organized-crime figures and found "insufficient credible evidence" to prosecute Donovan under federal law.

After the indictment of Donovan and the others, Merola told reporters: "I suspect we developed a fuller picture than Mr. Silverman."

The indictment, charging one count of larceny and 136 counts of handling false business records, names Donovan and seven other current or former Schiavone officials; the two owners of Jopel Contracting and Trucking Corp. (the subcontractor on the subway project), and the two companies.

Prosecutors say Schiavone records filed with the New York City Transit Authority indicated that Jopel, a minority company, performed work worth $12.4 million on the subway contract. But $7.4 million was returned to Schiavone for equipment leased by Jopel, according to court documents.

Prosecutors say the leasing arrangement inflated the amount that Schiavone appeared to be channeling to minority-controlled businesses and circumvented requirements on minority subcontracting.

Under federal law, minority contractors were to receive 10 percent of the work on the subway tunnel project. Jopel, the principal minority subcontractor on the job, is headed by William P. Masselli, a reputed organized-crime member charged with murdering a rival, Salvatore Frascone, in a dispute over another firm.

Masselli and his black business partner, state Sen. Joseph L. Galiber from the Bronx, were named in the Schiavone indictment.

The defense motion said the leasing arrangement between Jopel and Schiavone was conducted openly, used fair rental rates and properly reflected the value of Jopel's work. It added that the Department of Transportation encourages leasing arrangements to minority companies that cannot afford their own equipment.

Defense lawyers charged that Assistant District Attorney Stephen R. Bookin failed to instruct the grand jury on federal subcontract guidelines and did not provide enough specifics about the alleged crimes.

In the defense motion, Donovan and his co-defendants also criticized Merola for presenting evidence to the Schiavone grand jury about the Frascone murder. The motion said the district attorney's action "infuses the charges with the crude, baseless and highly inflammatory suggestion that the Schiavone defendants operate within the criminal underworld."

The defense lawyers also were critical of a news conference Merola held Oct. 2 to explain the charges against Donovan and the others.

Merola said then that Donovan "absolutely" knew about the illegal activities by Schiavone: "Certainly he and all of his employes and all of his officers . . . . Let's say to you that he knew about all these illegal transactions . . . . There is a lot of evidence. There are a lot of people who have to testify."

The defense also charged that prosecutors withheld exculpatory evidence from the grand jury. The motion said there is no reason to believe that some of the defendants, including Donovan, knew of the day-to-day arrangements concerning Jopel and the equipment leasing.

"There is reason to believe that a number of defendants were indicted solely or primarily by virtue of their employment. Conspicuous among these is Raymond J. Donovan," the motion said.

It charged that the indictment was based on "secondhand and hearsay evidence" presented by witnesses who appeared before Silverman's federal grand jury.

The defense lawyers argue that the earlier grand jury testimony should not have been provided to Merola. But a special panel of the U.S. Circuit Court of Appeals here ruled Dec. 5, in response to a complaint by Donovan, that Merola did not have to surrender that grand jury material.

The defense motion also challenged Merola's jurisdiction over the case because Schiavone is in New Jersey and the subway work was performed in a jurisdiction other than the Bronx.

Donovan has petitioned in U.S. District Court in New York to have his case separated from that of the other defendants and transferred to federal court.

The New York state trial is expected to begin in mid-March.