Sen. William Proxmire (D-Wis.), armed with a new federal audit, said yesterday the Justice Department had "failed miserably" in a five-year fraud investigation of Newport News Shipbuilding and Dry Dock Co. that was closed in 1983.

Proxmire said that the probe of $894 million in questionable shipbuilding claims "languished" for long periods because of staff turnover and shifting jurisdictions, and that it was dropped over the objections of several prosecutors in the case.

But Robert W. Ogren, chief of the Justice Department's fraud section, contended that the case had been handled properly.

"We reached a judgment based on the available evidence," Ogren said. "It appeared to me the investigation was reasonably thorough.

"I didn't see any major problems because of lack of resources or changes in personnel . . . . I just didn't think we had it."

The General Accounting Office, at Proxmire's request, conducted an extensive review of the Newport News probe. The case involved 264 claims that the company filed in 1976 for cost overruns on seven submarines, five cruisers and two aircraft carriers.

After Navy officials evaluated the claims and found that they might have been fraudulent, the U.S. attorney's office in Richmond began an investigation in August 1978. That office recommended that the probe be dropped in 1980.

The U.S. attorney's office in Alexandria then took over the case, saying it had not been properly investigated in Richmond, according to the GAO. In November 1981, aides to U.S. Attorney Elsie Munsell concluded that at least one Newport News claim was fraudulent, but decided to seek evidence of a broader conspiracy to defraud the government, the report said.

The Justice Department's Criminal Division took over the case in January 1982, but did no work for three months because a key attorney was not available to begin the case, the GAO said. This attorney later recommended that the investigation continue, and Ogren began to reassess the evidence that had already been compiled in the case.

In November 1982, according to the GAO, Ogren recommended that no indictments be sought because the company had adequate defenses on the questionable claims and there was a low probability of a successful prosecution. One of the Criminal Division lawyers disagreed with that decision, as did Munsell's office in Alexandria.

In a strongly worded memo the following spring, Munsell and three assistants compared the shipyard's claim to "a huge field of oil lying just beneath the surface. Wherever prosecutors probed, evidence of fraud bubbled to the surface."

Nevertheless, Criminal Division chief D. Lowell Jensen, now deputy attorney general, formally closed the case in August 1983.

The GAO report offered no conclusions. But Proxmire said it raised questions about "whether the Justice Department is committed to combat Defense procurement fraud."

"What was the Justice Department's justification for closing the investigation over the objections of the prosecutors in the U.S. attorney's office . . . ?" Proxmire asked. "Why did the Justice Department take so long to make up its mind . . . ?" He questioned why Ogren "reversed himself and decided to recommend against prosecution."

"I did not reverse myself; that is incorrect," Ogren said. He said he merely sought "a reassessment" of the evidence, which led to his decision to drop the complex case.

"Obviously, when you make judgments, some people disagree with you," Ogren said. "But we were the responsible attorneys in the case."