Paul Laxalt's mother had dreamed of rebuilding the Ormsby House hotel the family had once owned in Carson City. Laxalt was a proud man who loved his mother, so it became his dream, too. In 1972, 18 months after the end of his term as Nevada's governor, the shiny new facility opened its doors.

Thirteen years, millions of dollars and two huge boxes of legal papers later, Laxalt finds that the dream has brought him to an austere courtroom many blocks from this city's neon gambling halls. He has sent his lawyers here, however, not to test the hotel market in Carson City, but to examine the foibles and rights of American journalists, the nature of guilt by association and the reach of organized crime.

Opposing the Laxalt legal team is an array of attorneys for the newspaper powers of California's Central Valley, the McClatchy Newspapers, which publish the Sacramento, Fresno and Modesto Bees, and for Denny Walsh, a Pulitzer Prize-winning reporter who has spent his life looking for ties between politicians and the underworld.

Last year, when now-Sen. Laxalt (R-Nev.) was helping to guide his friend President Reagan toward a landslide reelection victory, Laxalt sued the McClatchy Newspapers, several editors and Walsh for $250 million, saying he was libeled in a story published the previous year.

The story began:

"Substantial sums of money were illegally skimmed from the proceeds of Carson City's Ormsby House Hotel Casino during the time it was owned by Paul Laxalt, now the powerful U.S. senator from Nevada and head of President Reagan's reelection campaign, according to federal tax agents who gathered the evidence 10 years ago."

The story filled 10 feet of newspaper columns and revealed the depth of Walsh's files on the far-flung business interests of individuals said by federal investigators to be part of organized crime. It said that Laxalt was associated, particularly in arranging the hotel venture, with some businessmen reportly linked to the underworld. One of them was Bernard Nemerov, said in the article's fourth paragraph to have "a long, documented history of association with some of the most notorious members of the national crime syndicate."

The article did not charge that Laxalt had broken any law and said its sources "did not know whether Laxalt himself knew of the scheme" alleged to have drained money from the new hotel.

Still, Laxalt almost immediately demanded a retraction of nearly everything in the article. He argued that even the many paragraphs that appeared to have nothing to do with him cast a shadow over his reputation by appearing in the same article with his name. In a deposition for the case, Laxalt denied that profits were skimmed and said he did not know whether his associates were connected to the mob.

The Bee and Walsh stood by the story. A few other news organizations, including CBS and ABC, appeared interested in pursuing the charges in the last days of the 1984 presidential campaign. Laxalt sued McClatchy newspapers and indicated that anyone else who pursued the Bee charges might find himself in court.

Today, the case stumbles toward a possible February trial date, dragging behind it the two key documents in the case, Walsh's 880-page deposition taken in Sacramento in September and Laxalt's 977-page deposition taken in Washington in October.

Magistrate Phyllis Halsey Atkins barred either side from releasing copies of the depositions after Laxalt attorney James Beasley complained to the court about Laxalt deposition excerpts appearing in newspapers. He indicated that he was particularly upset about reports of his instruction to Laxalt not to answer questions about a California Justice Department report on alleged skimming that failed to give his reasoning for the instruction.

The Washington Post obtained copies of both depositions before Atkins issued her order. Atkins vacated her order Dec. 20 after Beasley said her strong warnings against unethical behavior were enough.

Walsh's deposition takes him through much of his career, at the St. Louis Globe-Democrat, Life magazine, The New York Times and the Bee. Beasley, famous for a multimillion dollar-libel judgment won by one of his clients against The Philadelphia Inquirer, probes Walsh's sources and his views of journalism and the Mafia.

Beasley asked about Walsh's coverage of President Lyndon B. Johnson's alleged association with organized crime:

Walsh: He was associated with the Steamfitters [union]. The Steamfitters were organized crime.

Beasley: I see. Do I understand your -- you don't believe in guilt by association, do you?

Walsh: Yes, sir.

Beasley: Oh, you do?

Walsh: Yes, sir.

Beasley: Is that one of your firm principles, that if you are associated with somebody, you might be like them?

Walsh: No, one of my firm principles is that your associates are a very good way to judge people.

Beasley: So, with that old cliche "bird of a feather flock together?"

Walsh: Yeah, yeah.

In his deposition, Laxalt expressed a very different view when asked about his occasional contacts with casino owners in a state where gambling and tourism together form the top industry.

"A lot of law enforcement files [suggesting casinos' organized-crime involvement] have no validity, either," Laxalt said. "There is hearsay piled upon hearsay, and if repeated often enough, it will translate to what appears to be a fact. And I ascribe no importance to those unless there is a finding in a court of law. That's my standard."

Attorneys on both sides note that under Supreme Court precedents dealing with suits by public figures, Laxalt can win only by proving that Walsh and the Bee acted with "malice," that is, that they published false information purposely or with reckless disregard for the truth. Walsh denied any malice and said in the deposition that Laxalt's reputation appears unscathed by the story. Laxalt insists that the story not only damaged his reputation, but also caused him and his family "mental pain and anguish."

In the Walsh deposition, Beasley appeared to be setting up his case for malice in Walsh's handling of information from someone referred to as "Source No. 7." This source, whom Walsh described as an expert on illegal techniques for skimming money from casinos, said the alleged Ormsby House skim could not have worked as Walsh's Internal Revenue Service sources described it.

When Walsh said he did not recheck the skim's mechanics with his original sources, Beasley asked, "Well, then how in the world could you write a story about a skim that you couldn't even verify that had occurred?"

Walsh's attorney replied that the story never reported the mechanics of the skim, only that Walsh's IRS sources had information from hotel employes that proceeds might have been stolen by some organized-crime figures. Walsh's article said the evidence, never formally investigated by any federal agency, indicated that about 20 percent was skimmed off.

The article also said the hotel casino was in debt the entire time Laxalt owned it, which some sources attributed to cold winters, a gasoline shortage and bad management. The skimming allegations, the story said, were "an indication of yet another factor."

Besides the alleged skimming operation, the Bee story focused on the original financing of the hotel casino's construction. Walsh's story said Laxalt and his brother Peter obtained $5 million in loans from three Nevada banks but needed more. The additional money, the story said, came from the First National Bank of Chicago.

Laxalt testified that he borrowed a little more than $2 million from the bank. Laxalt had been introduced to one of its vice presidents, Robert Heymann, by Delbert Coleman, described in the story as "a free-wheeling Chicago financier" who "had been identified as a mob associate." Coleman at one point was also considered "an eventual potential investor" in Ormsby House, Laxalt acknowledged in his deposition. Laxalt said that this had been his "fond hope" but that Coleman's participation could not be arranged.

Walsh's story said that when Laxalt was governor, Coleman had assumed control of the Parvin-Dohrmann Co., which owned two Las Vegas casinos. The story said Coleman later put his stock "in an irrevocable voting trust and turn[ed] the company over to new management" in partial settlement of a Securities and Exchange Commission civil suit alleging stock-price rigging.

Laxalt told the Bee attorneys he knew of the SEC suit against Coleman but considered him innocent until proven guilty. He said that he had never dealt with consent decrees of the sort in which Coleman stepped back from his Las Vegas operations and did not know precisely what they meant. He told the Bee attorneys he thought Coleman's gambling license could have been restored if he had become a part of the Ormsby House project.

After making several loans to Laxalt, Heymann "pleaded guilty to fraudulent banking activities unrelated to the Laxalt loans and was put on four years probation," the story said.

Laxalt's original demand for a retraction of the Bee story challenged "the libelous inference that mob-assisted money was being provided to the Ormsby House." The loans from the Chicago bank "followed normal banking procedures," his Nov. 18, 1983, letter to the Bee said. He objected to "the inference that Mr. Coleman did some unusual act by introducing me to Mr. Heymann and that this had something to do with Mr. Korshak."

In his article for The Bee, Walsh described the background of Coleman, whom Laxalt hoped would join him as an investor in Ormsby House, in terms of Coleman's alleged associations with organized crime figures.

Two of Coleman's partners in the two Las Vegas casinos he controlled through Parvin-Dohrmann were Sidney Korshak and Edward Torres, said by the Bee to have "documented ties to organized crime and to Nevada casinos proved by the federal government to have been skimmed by the mob." The story also said Korshak was "an old friend" of the father of banker Heymann.

Walsh wrote that Korshak "brought his friend Coleman" together with Albert Parvin for the negotiations that gave Coleman a controlling interest in the Las Vegas casinos. Walsh wrote that Korshak also arranged for Coleman to meet with Morris (Moe) Dalitz, "a transplanted Cleveland mobster who helped establish organized crime's hold on Nevada gambling. Dalitz then sold the Stardust hotel casino to Parvin-Dohrmann, and Korshak received a $500,000 finder's fee . . . ."

Coleman did not invest in Ormsby House. The story devoted several paragraphs to the relationship of Nemerov, who did invest, and Allen Dorfman, an official of the Teamster Union's Central States, Southeast and Southwest Areas Pension Fund, which had invested in Nevada casinos. Walsh's story said Nemerov denied knowledge of any skimming at the Ormsby House during the year he spent there.

The article said Dorfman used a pension fund loan to "set Nemerov up as the owner of record" of an Ohio insurance company as a front for Dorfman. Dorfman was convicted twice on federal criminal charges related to pension fund business, the Bee reported. He was shot to death in early 1983 while awaiting sentencing for his conviction as part of a conspiracy to bribe then-Sen. Howard W. Cannon (D-Nev.). The Bee said investigators thought Dorfman might have been killed to keep him from exchanging organized crime secrets for less time in prison.

Laxalt testified in the deposition that he knew Dorfman well, had attended a birthday party for him in Chicago and had met with him several times. After one meeting with Dorfman, Laxalt said, he wrote a letter to President Nixon in 1971 suggesting that Teamster boss Jimmy Hoffa's prison sentence be reduced.

In his original demand for a retraction from the Bee, Laxalt said the article's description of the Nemerov-Dorfman relationship and Dorfman's ties to Hoffa created "the false and misleading inference that the Ormsby House or myself was associated with those persons in its operation in Carson City."

Laxalt and his attorneys declined to comment on the case, but an associate of the senator familiar with his thinking said "any reasonable person who reads the Walsh deposition will realize that he went forward with a malicious piece targeting Paul Laxalt with unsubstantiated sources and unsubstantiated facts."

Walsh, in an interview, said Laxalt's attorneys have continually misreported the contents of his story. There was never an IRS investigation of the Ormsby House, he noted, but only the collection of some initial evidence that was never pursued.

At several points in his deposition, Walsh quotes sources suggesting that Laxalt was guilty of naivete and mismanagement rather than of knowing links with organized crime. Laxalt has denied mismanaging the casino, but has not denied that the Ormsby House was a money-losing proposition while he owned it.

Laxalt's supporters have so far raised $275,000 for a trust fund to pay the legal costs of discrediting what the suit calls "this all-pervasive defamatory product [which] could serve as a checklist for irresponsible journalistic technique." One Laxalt supporter suggested that the story was part of a continuing campaign by the Bee, which criticized Reagan even when he was California governor, to savage another conservative Republican.

Temporarily at least, the suit has succeeded in stymying McClatchy investigations. Because of this and other suits involving mob-related stories, Walsh has had to stop reporting and has become what he calls "a full-time litigant." He reports not to an editor but to a company lawyer. "It's the price you pay," he said in an interview. "If you want to undertake this kind of reporting, you've got to be prepared for it."

Laxalt appears to have suffered no political harm from the article. Republican Party leaders were distressed when he announced that he would not run for reelection in 1986, for he remained by far the strongest candidate to keep the Nevada seat. He told supporters that he had begun to find the Senate "stultifying" and wanted to return to private law practice. His supporters say he wants to fight the suit to the end because the story called into question his personal integrity.

"The Bee left him no choice," one supporter said.

Walsh offered another theory for Laxalt's persistence, speculating that the senator has spent much of his life in elective office and has not amassed much of a personal fortune. "He desperately wants to make some money somewhere," Walsh said. "He sees this as a way to do it."

A Laxalt supporter called the suggestion "incredible."

"If he was so desperate for money," the supporter said, "why would he have devoted his whole life to public service?