A lawyer for former Mobil Corp. president William P. Tavoulareas asked the U.S. Court of Appeals here yesterday to reinstate a jury's 1982 verdict that The Washington Post libeled Tavoulareas when it said he "set up" his son in a company that did business with Mobil.

"The very integrity of the jury system" and the right to trial by jury guaranteed by the Constitution, are "under fierce attack" in this case, John J. Walsh told the court.

Walsh said the jurors properly weighed the evidence and the trial judge improperly overturned their finding. Judges should not "retry the case" because they "have no way of getting at the rich mix of highly controverted facts" in the case.

Arguing for The Post, attorney Edward Bennett Williams said the 1979 article was a "totally truthful story" and that there was "no evidence in this record that [the reporter] Patrick Tyler had any knowledge of falsity or any serious doubt" that the story was true.

"Anyone who would believe a $14,000 clerk went to 75 percent owner of Atlas [Maritime Co.] on the theory of meritocracy has to believe in the tooth fairy," Williams argued. "That is what the story was about."

The Post story said that Tavoulareas "set up his son" Peter, now in his mid-thirties, in 1974 as a partner in a London shipping management firm, Atlas Maritime Co., which in turn operated some Mobil-owned ships.

The Tavoulareases said the story was false and that it embarrassed them and held them up to ridicule. They sued the newspaper in November 1980 for $50 million. A District Court jury, after a 21-day trial in July 1982, found the newspaper had libeled the elder Tavoulareas and set an award of $2,050,000.

In May 1983, the trial judge, Oliver Gasch, overturned the jury's decision, saying the article "falls far short of being a model of fair, unbiased investigative journalism, but that there was "no evidence in the record . . . to show that it contained knowing lies or statements made in reckless disregard of the truth," the evidence needed to show that the paper acted with "actual malice."

Two years later, a three-judge panel in turn threw out Gasch's ruling. Senior Judge George E. MacKinnon, joined by Judge Antonin Scalia, said there was "clear and convincing evidence" to support the jury's verdict. Last June, the full Appeals Court threw out the panel's ruling pending its decision.

In yesterday's hearing before the full court and a packed courtroom, several judges asked the lawyers how much authority an appeals court had to reexamine the facts and to overrule either what the jury or trial judge had done in a First Amendment case.

Walsh argued that the Constitution requires that judges reviewing the case must weigh the evidence in the light most favorable to the party who won the verdict -- in this case Tavoulareas -- and not substitute their choices for the jury's when there is conflicting evidence.

Under that standard, Williams countered, the jury verdict would always be reaffirmed. "It would be like an election recount where you don't count the precincts, you just recount what the wards turned in."

Williams said the judges, under a 1984 Supreme Court decision, were obligated to conduct a complete review of the evidence in the case.

Judge Kenneth W. Starr at one point said he could not see, from his review of the facts, where the central point of the story could be "deemed to be false."

Walsh said "you read it in a way negative to[Tavoulareas'] claims . . . you are required to read it in a positive way." Walsh said the trial "was complex; it was loaded with [so many] factual issues . . . [which is] one of the best reasons" to defer to the jury's verdict.

Attempting to revive an argument accepted by MacKinnon and Scalia but voided by the full court, Walsh also argued that Tyler was under pressure to "create sensationalistic stories." Walsh said that such pressure could be taken into account by the jury in assessing whether he may have known the story was false before it was published.

Williams, whose impassioned style contrasted sharply with Walsh's low-key presentation, said that "it was a distortion and an abortion of the record . . . to think that writing false stories . . . would be the way to succeed at The Post."

Williams closed by apologizing to the court for his fervor, saying it was "difficult to discuss a liberty this precious without getting excited."

Walsh said Williams' presentation would have been a fine summation at a jury trial. "The time for it has passed," Walsh said. "He [Williams] wants you to think that you are the new jury . . . you are not the jury," and as appeals judges must defer to the jury's basic findings.

Eight of the nine active judges on the court heard the arguments. The ninth active judge, Robert H. Bork, excused himself from the case. Under court rules, MacKinnon, though semiretired, is eligible to vote because he participated in the panel decision. It is not known when they will decide the case.