Gov. Harry Hughes and Maryland legislators began drafting legislation tonight to end the state savings and loan crisis amid growing concern about how far the government should go in bailing out faltering financial institutions.

Despite predictions by Hughes and legislative leaders of swift passage of several measures to protect depositors, there was no agreement about how to prop up the privately insured state-chartered associations so they can qualify for federal insurance.

"We must be very careful that the Maryland taxpayer doesn't bear the brunt of the greed and avarice of a certain small number of loan companies and their investors," said State Sen. Julian L. Lapides (D-Baltimore), a member of the Senate budget committee that will consider part of the legislative package.

Attorney General Stephen Sachs has begun a criminal investigation of insider loans and conflicts of interest at Old Court Savings and Loan, where the run started last Thursday following news reports of management problems there.

Lapides and other legislators warned that the state's AAA credit rating may be impaired by issuing $100 million in general obligation bonds that the governor wants to use to help state-chartered associations so they can qualify for federal insurance.

In Washington, House Banking Committee Chairman Fernand St Germain (D-R.I.) said the federal government should not provide "bail-out services at bargain basement rates" to privately insured S&Ls that get into trouble.

Maryland and other states permitted some associations to offer higher interest rates than federally chartered institutions can pay and to engage in "highly profitable -- if not risky -- investments and endeavors," St Germain said. He said he questions "the wisdom of public policy which allows these operations to continue if the federal government has to come in and clean up the mess."

The White House issued a statement saying, "The federal system is safe and protected" and the problem in Maryland "has been discussed at the White House, but these are state matters."

Hughes, in an afternoon press conference, sought to quell concerns about the cost to the state and to end confusion about the $1,000 per month limit on withdrawals that he imposed on Tuesday.

As the limit began to disrupt the finances of hundreds of thousands of Maryland residents, the governor said it had to continue to give savings associations time to apply for coverage from the Federal Savings and Loan Insurance Corp.

"We have to stick with these guidelines and impress on the savings and loans to get in their applications for federal insurance so they can open the doors without any restriction," Hughes said. "This is essential, this is our main goal right now."

As for how the state's issuing bonds might affect the AAA credit rating that enables Maryland to borrow money at lower rates, Hughes said, "I don't think that will have any effect on the bond credit rating." States that borrow more generally have lower credit ratings.

"We are talking about authorizing $100 million, not necessarily issuing them," said the governor. "If things go as we expect them to go, we may not have to issue all off it . . . and maybe only a relatively small part of it."

About 20 lawmakers -- including the leadership of both the Maryland House and Senate -- and scores of Hughes administration officials began debating several draft bills behind closed doors in the governor's suite in downtown Baltimore. Reporters were barred from everywhere but the lobby of the 15-story building.

The governor's legislative counsel, Benjamin Bialek, said the meeting did not constitute "a quorum of a public body," as required by the state's open meetings law.

There was speculation that big out-of-state banks, including Citicorp and Chase Manhattan, might be willing to buy some troubled Maryland savings and loans to gain the right to do business in the state, but no progress was made on efforts to find someone to take over Old Court.

Old Court and Merritt Commercial Savings and Loan Association of Baltimore remain under direct control of a state-appointed conservator while operations of the remaining 100 privately insured associations are restricted by an emergency executive order imposed at 4:47 p.m. Tuesday.

The $1,000 limit on withdrawals will be lifted as soon as savings and loans qualify for federal insurance. That could be as early as next week, said executives of Chevy Chase Savings and Loan and Second National Building and Loan, which applied for federal coverage well before the crisis.

Three small S&Ls late today filed a suit in Baltimore City Circuit Court asking that the governor's order be lifted on their business accounts. The thrifts said that a number of their business and charitable clients cannot make their payrolls under the order. They also asked that the court raise the limit on all withdrawals to $5,000.

Circuit Court Judge Joseph H.H. Kaplan set a hearing for noon tomorrow on the request.

Ira C. Cooke, who represents the Organization of Maryland Stock Savings & Loan Associations, made up of the 17 or 18 largest thrifts, said nearly all of the members of that group have applied for federal insurance.

David Rubenstein, an attorney for Chevy Chase Savings and Loan, the state's largest privately insured thrift, said, "We were in good shape" before the governor imposed the $1,000 withdrawal limit "and we were disappointed with his action. We were liquid before, and we will remain liquid."

Though savings and loan lobbyists in the past have blocked efforts to restrict the activities of state-chartered thrift institutions, there was little real opposition within the industry to Hughes' sweeping restructuring of the savings and loan regulatory framework.

Regardless of what the General Assembly does, the savings and loan crisis seems certain to lead to broad restructuring of the state's financial system. Savings and loan executives said they expect some members of the Maryland Savings-Share Insurance Corp. (MSSIC) to merge or be taken over and others to go out of business.

State regulations that allow MSSIC members to keep their financial condition secret should be repealed, Henry A. Berliner, president of Second National Building and Loan Inc. urged.

Berliner called for "full disclosure" of the names of financial institutions that do not meet regulatory standards so depositors will know whether they are putting money in shaky associations.

"The bank knows how good a credit risk you are," he said. "Every city or state that goes to the bond market to borrow money has their credit rated by investment analysts . . . isn't the public entitled to that same degree of knowledge about the same financial institution that goes to the public and borrows the public's savings for the bank's use?"

Since he returned from a trip to the Middle East Monday -- four days after the crisis began -- Hughes has thrown a temporary umbrella over the privately insured associations and sketched plans for a permanent structure.

He has proposed legislation that would force all but the smallest members of the private MSSIC to get new insurance from FSLIC, the government agency that insures federally chartered thrift institutions.

Under his plan, the 70 state-chartered associations with assets of less than $25 million each would be the allowed to retain private insurance. MSSIC has pledged part of its $300 million in assets as collateral for loans to some of its troubled members, but so far has not dipped into its insurance fund.

MSSIC insures each depositor's account up to $100,000 but its member institutions had $475 million in jumbo accounts of more than $100,000 that will not be fully insured, Sen. Howard Denis (R-Montgomery) told a congressional hearing in March.

Since many MSSIC institutions do not qualify for FSLIC coverage, the governor wants the state to issue bonds and in effect invest its money in the thrifts.

The governor said his actions appear to have stemmed the panic among depositors that began at Old Court, spread to Merritt when problems were reported there, and then lapped over into many other savings associations in the Baltimore area.

"The lines have shortened at the savings and loans," said Hughes, while noting that withdrawals continued to be heavy "because checks are still clearing." The day before, it was disclosed that $630 million had been drained out of Maryland associations in the last few weeks and the withdrawals were continuing to increase.

Washington area savings and loan offices reported lines for the first time today, as depositors grabbed for at least a piece of their savings.

The Hughes administration planned to set up a telephone hot line to handle public inquiries.

Despite Hughes' public assurances and the wholehearted support his proposals have received from General Assembly leaders, a number of legislators today raised warning flags about the measures they will consider at the extraordinary session on Friday.

House Minority Leader Robert R. Neall (R-Anne Arundel), while stressing that he is "giving the governor the benefit of the doubt," complained that he and his colleagues will be asked to enact sweeping and complex legislation whose effects are still unknown.

"The governor is preparing to pledge the full faith and credit of the state to solving this problem," said Neall, "but I don't know how deep the hole is."

Neall said that authorizing $100 million or more in new state debt to fund a capitalization program so that savings and loan associations may meet FSLIC insurance requirements and to fund the new state insurance agency could potentially jeopardize the state's long-held AAA bond rating and make a shambles of the state's self-imposed capital debt limit of about $220 million a year.

"My biggest problem in issuing the debt is that we just don't know how big the problem is," said Neall. "If $220 million in debt was right for the state of Maryland in fiscal 1986, $100 million more is going to raise some eyebrows in New York. The governor may have some information that will knock my socks off, but he may have to produce that information to get me to authorize that state debt."

Some of those concerns were shared by Maryland Comptroller Louis L. Goldstein, who has jealously protected the state's bond rating for at least a quarter of a century.

"Anything you do that's different is a concern," said Goldstein spokesman Marvin Bond. "We're not going to lose it the rating tomorrow. But prudence is the name of the game."

Goldstein's staff has begun discussions with the Standard and Poor and Moody's rating houses to assess the impact, Bond said.

Whether such concerns will have much effect when pitted against a legislative leadership that is in total support of the governor and that is determined to win approval for his proposals quickly on Friday is uncertain.

State Sen. Laurence Levitan (D-Montgomery), the chairman of the Senate budget committee that will have to authorize the debt legislation, said the very complexity of Hughes' proposals works in his favor.

"The issue is so complex that it will go fairly fast and fairly easy," said Levitan. "I think we're stuck. We have to go with it. We may have to cut back on the capital program next year. That is certainly a possibility. But it is also possible that by the time we meet again next January most of the money will be repaid."

Levitan said legislators may also be concerned that as associations leave MSSIC to join FSLIC, they will drain the private insuror of assets, leaving the state to take over a bankrupt agency.

At his press conference today, Hughes said his administration is "making every effort" to protect the MSSIC insurance fund. "We in no way want that fund to be wiped out," said the governor. "When the legislation passes we want associations that need a share of that fund to meet the federal insurance requirements to have it available."

Lurking in the background of Maryland's S&L crisis this week are a number of still unanswered questions about the long-term political effects on key players like Hughes, Attorney General Sachs and House Speaker Benjamin L. Cardin, all of whom are expected to face the voters in 1986.

How Hughes ultimately is graded for his handling of the crisis could affect a likely bid for the U.S. Senate. And both Sachs and Cardin, whose first cousin is a principal figure in Old Court, are running for governor.