Sen. Charles E. Grassley (R-Iowa) has urged Attorney General Edwin Meese to prosecute individuals and companies who have received classified Pentagon budget information to use in preparing bids for defense contacts.

Grassley's comments, expressed in a meeting with Meese last Friday, came as senior Justice Department officials are deliberating whether to proceed with prosecution of GTE Corp., a major communications and electronics firm, for allegedly obtaining classified budget documents through one of their former consultants, Bernie Zettl of Alexandria.

In an earlier letter to Meese, Grassley said he was concerned about reports of misuse of the budget information because "the transferring of this data to select contractors renders competition within the defense industry a farce." He urged Meese in the letter, and again in his visit, "to prosecute those involved in any such trafficking conspiracies," according to a Grassley spokesman.

Meese assured Grassley that he was personally involved in the GTE case and that his department would not ignore leaks of classified documents, said a Grassley aide who was at the meeting.

Several individuals familiar with the GTE case, now before a grand jury in Alexandria, say it represents an effort to halt what some say has been a widespread practice by defense contractors of obtaining classified documents through a "good old boy" network of Pentagon officials and defense consultants, many of whom are former military officers.

The outcome of the GTE case also could affect the credibility of Justice's three-year-old Defense Procurement Fraud Unit, which recently came in for some harsh words from Grassley for what he regards as its poor track record in pursuing the major and significant cases.

Agents of the Defense Department's Office of the Inspector-General working with the fraud unit have been conducting a criminal investigation of GTE, a Danbury, Conn.-based electronics firm, for almost two years, sources familiar with the investigation said.

The company was notified by Justice in January that it was the target of a possible indictment by the Alexandria federal grand jury, sources said. The indictment would name individuals as well as the corporation itself, they said.

The case has been under review since then. Under current procedures, the target of a possible indictment is allowed to discuss with Justice officials why he should not be indicted. A spokesman for GTE said yesterday the firm is cooperating with Justice, but declined further comment. It has hired the Washington legal firm of Williams & Connolly to present its case, sources said.

A routine government audit set off the GTE investigation when government auditors discovered the company had classified papers outlining spending priorities for some electronic intelligence-gathering equipment and weapons for the Air Force and Navy, sources said.

Several individuals familiar with the investigation said DOD agents have not been able to pinpoint who in the Pentagon may have leaked the documents to Zettl, then GTE's consultant.

Zettl, 62, is a retired Air Force major whose defense consulting firms were Zetcon and BEZ Associates. He could not be reached for comment yesterday.

According to one source, the fraud unit had completed much of its investigation in the GTE case by the middle of last year. The delay in going forward has already meant the loss of one potential government witness who fled the country to Libya after he was found guilty of defrauding the government in a separate case, the individual said.