More than half of the 140 members of the Virginia General Assembly have strong financial ties with the banking industry they help regulate, a finding that comes amid harsh questions about conflicts of interest as one state senator faces criminal prosecution for a banking conflict.

On the two powerful committees directly responsible for banking and related issues, three-fourths of the members receive income or own stock in the industry, a review of their financial disclosure reports shows. Many lawmakers are appointed to bank boards after they are elected to the legislature, according to the forms.

What some consider the cozy relationship between legislators and business interests that is traditionally tolerated here, where conflict-of-interest laws are considered weak, has been jolted by the prosecution of state Sen. Peter K. Babalas (D-Norfolk). Some nervous lawmakers are making fitful attempts to back away publicly from what previously would have been considered routine votes on financial issues.

The conflicts issue erupted last week on the powerful House Corporations, Insurance and Banking Committee, where 15 of the panel's 20 members have a personal interest in some type of financial institution.

After seven members nervously abstained from voting on an amendment to a bill that would have expanded branch banking for independent banks, Chesapeake Democrat V. Thomas Forehand Jr. -- director of a small bank and author of the amendment -- rushed to change his vote from "yes" to an abstention.

"I think you're going to see a lot of that," said Del. Vincent Callahan (R-Fairfax), a savings and loan executive who serves on the banking committee and on the House ethics committee that would investigate conflict questions. "Everybody's in sort of a dilemma."

"There are enough people involved that it's got to be submitted to the ethics committee for an opinion," said Sen. Wiley F. Mitchell, a Republican from Alexandria.

The reports of conflicts come as banking problems have been spotlighted nationwide and as media attention has focused on the criminal prosecution of Babalas. Babalas, the fourth-ranking member of the Senate, is charged with voting last year to kill legislation that would have affected a now-bankrupt second mortgage firm that paid him $61,000 in legal fees.

Babalas, known as a tough political infighter, has said that if he goes to trial, he may call upon legislators and others to testify on their close relationships with private business.

Among all the special business and professional influences in the legislature -- including lawyers -- none is as pervasive as the banking and financial industry, where lawmakers sit on banking boards, hold substantial amounts of stock and represent financial institutions as lawyers.

The highest ranking members of the legislature have some of the strongest ties with the financial industry:

*House Speaker A.L. Philpott (D-Bassett) is director of Dominion Bank, owns stock in loan companies and banks, and represents financial institutions in his law practice.

*Senate Majority Leader Hunter B. Andrews (D-Hampton) is a director of Sovran Financial Corp., a director on the advisory board of the Hampton branch of Sovran, and represents banks and savings and loan associations as an attorney.

*Del. C. Hardaway Marks (D-Hopewell), a ranking member of the House who sits on the banking committee, is chairman of the board and a major stockholder of Community Finance, vice chairman of Central Fidelity Bank's Hopewell branch and has banks and finance companies as clients in his law practice.

*Senate Minority Leader William A. Truban (R-Woodstock) is chairman of the board of Stonewall Jackson Bank and Trust Co. and a director of Farmers and Merchants National Corp.

Del. Alson H. Smith Jr. (D-Winchester), a House banking committee member who was frustrated by the rash of abstentions, urged that the House ethics commission clarify when members with banking interests should abstain.

"I don't see anything particularly wrong [now]," said Smith, director of Jefferson Bankshares Inc. and a shareholder in First Virginia Bank. "I've been voting on those bills for a long time and I own some bank stock . . . . I can't control how the media looks at it."

Many legislators, who are paid $11,000 year plus expenses, argue that potential conflicts are inevitable in a part-time "citizens legislature" in which members must have outside interests and jobs to earn a living.

Others, including consumer advocates, contend the opposite -- that the reason strong conflict-of-interest laws are needed is that nearly all legislators have some personal interest in legislation that comes before them.

"There are a number of states that are a good deal stronger than Virginia is" on conflict-of-interest matters, said Edward Feigenbaum, who has studied ethics questions nationwide for the Kentucky-based Council of State Governments.

Some legislators say they believe that this year's unusual flurry of concern in Virginia over the potential conflicts between those personal involvements and legislation may be temporary.

"In another year or two, if we don't have another rhubarb, these fears will subside," said Sen. Elliot S. Schewel (D-Lynchburg), a director and major shareholder in Sovran Bank and a member of the Senate Commerce and Labor Committee, which oversees banking laws.

The Babalas case is the latest and most serious of the conflict-of-interest allegations involving state officials in recent years. State Sen. John H. Chichester's unsuccessful campaign for lieutenant governor last fall was dogged by reports that the Stafford County Republican sponsored legislation that would have affected his insurance business directly.

In 1981, another Republican candidate for lieutenant governor, former state senator Nathan Miller, was defeated following reports that he sponsored legislation that substantially helped some of his law clients.

Virginia legislators say that the conflict-of-interest laws that they have enacted are vague, leaving decisions on when to vote and when to abstain up to the lawmaker's conscience. Most legislators say they use as their main guidepost whether a bill would affect an industry generally or have a narrow effect.

"This is the heart of the fuzziness -- deciding when a piece of legislaton is broad enough that it's not serving any particular interest so that you can vote on it," said Sen. Joseph V. Gartlan (D-Fairfax), who represents major banks and other financial institutions as a Washington lawyer.

Sen. Richard L. Saslaw (D-Fairfax), a member of the Senate committee that oversees banking legislation, contends that legislators should not vote on laws that affect any aspect of an industry in which they have financial interest, saying the generic argument is weak.

"That's saying, 'If it puts money in every banker's pocket, not just mine, it's okay.' That's wrong. You're not supposed to vote on things you have a financial interest in."

But other legislators say they rely on colleagues with expertise in certain areas to guide them through frequently complex, technical legalese.

"Obviously, people who serve on bank boards know more about banking legislation," said Mitchell. "If you throw them off, you may be depriving the legislature of a primary source to understand this stuff."

The pervasive banking contacts on the committee provide a welcome environment for the powerful banking lobbyists who frequently play an integral role in the writing of banking l ws.

When financial institutions are considering membership on their boards of directors, "some feel 'it's nice to have a legislator on our board who will understand our problems when these things come up,' " said Sen. Clive L. DuVal II (D-Fairfax), a major stockholder in the McLean Savings and Loan Association. "They would understand and be sympathetic to a bill. I don't think there's anything pernicious about it."

Those legislators frequently rely on the financial lobbyists who are fixtures in the banking committee and subcommittee hearings.

When Del. W. Tayloe Murphy (D-Richmond County) introduced a measure at a recent House banking committee hearing that he said made "no substantive change" in the law, committee Chairman Thomas W. Moss Jr. (D-Norfolk) immediately called out to banking lobbyist Jack Edmunds, "Would you agree with that?"

And when the competing savings and loan association lobbyist plugged a measure for his group, Moss questioned, "Do the bankers get along with this?"

When the joint House-Senate subcommittee on interest rates meets in its glassed-in conference room in the General Assembly building, the financial lobbyists sit elbow to elbow with legislators, "making suggestions, giving expert advice," according to subcommittee member Callahan.

Callahan said those committees regulating the financial industry of the state are the most sought after "by members, because they get campaign contributions out of it, quite frankly."

The friendly relations fostered by that web of connections has helped make the lobbyists for the financial industry some of the most powerful in the state capital, according to many legislators.

"They never lose," said Fairfax's Saslaw. "The financial institutions are considered the golden goose in Virginia. They're very good at extracting anything they want from the General Assembly . . . . When they pour the heat on, they generally get what they want."