A long-simmering feud between Justice Department officials and Sen. Charles E. Grassley (R-Iowa) has exploded into open warfare over Grassley's handling of a subcommittee hearing that prosecutors contend may have jeopardized a pending defense procurement case.

The dispute flared up Tuesday at a Senate Judiciary subcommittee session when Grassley, the panel's chairman, sought testimony from a former Defense Department investigator who worked on a criminal case involving GTE Corp. The surprise witness, Robert L. Segal, had prepared a statement that sharply criticized the Defense Procurement Fraud Unit, a joint Justice Department-Defense Department office, for its handling of the GTE case.

As soon as Segal began, Deputy Assistant Attorney General Victoria Toensing jumped up, grabbed the microphone and demanded that the testimony be halted, saying it would damage a pending case against three current and former GTE employes. Grassley excused the witness after a heated conference, but copies of Segal's prepared statement were distributed to reporters, which Grassley's staff said later was inadvertent.

Grassley dismissed suggestions that Segal's testimony might damage the case, saying, "This outburst is merely another weak attempt by the Justice Department to hide from public scrutiny its handling of procurement cases."

The confrontation pits a maverick Republican freshman whose frequent attacks on defense fraud have been immensely popular back home against federal prosecutors who view him as a grandstanding politician trampling on their cases to boost his 1986 reelection campaign.

"The release by Sen. Grassley's staff of erroneous, misleading and inflammatory information about a criminal case that is currently pending trial is most unfortunate and regrettable," the Justice Department said in an unusually harsh statement. "Sen. Grassley and his staff have been repeatedly briefed on the perils of publicly discussing an open criminal case, and it appears that these warnings have gone ignored."

The department accused Segal of "massive distortions" and "reckless characterizations" about the GTE probe and said it hoped "to minimize the damage that may have been done to the case."

Grassley replied that "it is impossible to contend that any of Mr. Segal's generalized comments about mismanagement at the fraud unit could be construed under any circumstances as prejudicial to the government's case."

Grassley said in an interview yesterday that he still plans to have Segal testify.

"They have been stonewalling me for months and months," Grassley said. "They haven't liked these hearings because . . . they don't want the truth out about their handling of these cases."

As for his alleged political motives, Grassley said: "Way back when challenging the Defense Department was the eccentric thing to do, I was doing it."

But Justice officials are still fuming over what they view as a sneak attack. Toensing said yesterday that "we were not even provided customary notice" that Segal would be testifying. She said she grabbed the microphone because "the first instinct I had was that my case had to be protected. It was just pure instinct."

Segal, who resigned from a Pentagon investigative unit in January, said in his statement that Justice officials had repeatedly delayed bringing charges in the GTE case. A GTE subsidiary pleaded guilty last month to improperly obtaining classified Pentagon documents involving weapons contracts the company was seeking to bid on. The three former and current employes are awaiting trial on similar charges.

Segal said the Justice probe "involves 25 companies, not just GTE," that "many of these companies are household words" and have "espionage units" devoted to obtaining classified documents. He said classified Pentagon documents "are regularly trafficked among private consultants, companies in the procurement industry and military and civilian employes of the government."

Justice Department sources said this testimony could bolster defense arguments that the GTE employes are being selectively prosecuted for what is a common industry practice and that there were improper delays before the indictments. They said the case moved slowly because it was complex and novel.

These officials said Segal was a middle-level agent who magnified his role in the case although he was excluded from senior strategy meetings. Segal declined to comment yesterday.

Grassley has repeatedly angered the Justice Department by demanding internal prosecution documents, generally without success. Days before the 1984 election, Grassley's subcommittee voted to hold then-Attorney General William French Smith in contempt of court for failing to turn over subpoenaed documents involving an investigation of General Dynamics Corp.