In a blow to one of the Washington area's fastest-growing financial institutions, a federal judge has ordered Dominion Federal Savings and Loan Association to pay Penthouse magazine's owners $129 million for reneging on a loan to build a casino-hotel in Atlantic City.

Accusing Dominion's chairman of a "cover-up" and its lawyer of "outrageous perjury," U.S. District Judge Kevin Thomas Duffy in New York said in a decision announced yesterday that Dominion illegally breached its commitment to lend Penthouse International $35 million. Dominion's withdrawal prompted the collapse of a $200 million project to build a casino-hotel on the boardwalk, Penthouse had alleged.

Dominion officials immediately denounced the decision, said they plan to appeal, and expressed confidence that they would prevail in the end. However, Dominion stock plunged 36 percent yesterday on news of the decision.

The ruling could have an adverse effect on the McLean-based institution, which has a net worth of $74 million. If the decision is upheld, federal savings and loan regulators could have to oversee the sale of Dominion and transfer of deposits to another institution, said David L. Erickson, senior executive vice president of Dominion Federal. Depositors' funds are insured by the Federal Savings and Loan Insurance Corp. up to $100,000 per account and are in no danger, a federal regulator said.

"We're in complete shock," Erickson said. "We don't agree with {the decision} at all."

Instead, Erickson said Penthouse was to blame for the collapse of the project because it failed to provide adequate documentation or collateral for the proposed loan. He said the bank's lawyers are reviewing the case to determine if Dominion should set aside money to pay for any ultimate judgment after its appeals are exhausted -- a move that could dramatically cut Dominion's profits.

But Erickson added: "To date, our counsel believes the judgment will be overturned, and we will probably not have to set up a reserve."

Penthouse officials declined comment yesterday. A spokeswoman for the Federal Home Loan Bank in Atlanta, which oversees Dominion Federal, said the bank is monitoring the situation but plans to take no action until a clearer picture emerges of Dominion's ultimate legal liabilities.

The judge's decision this week culminated a bitter three-year legal battle between Penthouse and Dominion, which -- under the direction of its hard-charging chairman, William E. Walde -- has accumulated $1.8 billion in assets during its 13-year history. The S&L, which reported $18.6 million in profits for the fiscal year ending in March, operates 31 savings branches, all but one in Virginia, and 25 mortgage offices up and down the East Coast. It has roughly 150,000 depositors, according to Erickson.

The dispute in question involved an Atlantic City casino-hotel complex that Penthouse publisher Robert Guccione has spent almost a decade trying to build, so far unsuccessfully. Construction on the project was halted in 1980 after money ran out, leaving abandoned buildings and steel girders on Penthouse's property on the boardwalk.

The project was revived in 1983 after Dominion agreed to be one of the lead lenders in a consortium that agreed to give Penthouse a $97 million loan. The deal never went through, however, and Penthouse sued Dominion for breach of agreement.

A three-week nonjury trial was held in May. In the decision issued this week, Duffy concluded that Penthouse was entitled to damages for various expenses incurred in the project, for the costs of preserving its property, and for $112 million in lost profits that Penthouse would have earned over 10 years if the casino and hotel were running.

In a ruling laced with tart language, Duffy essentially agreed with Penthouse's allegations, recounting a tale of double-dealing and deceit on the part of Dominion and its lawyer in the transaction, Philip Gorelick, a partner at the Washington firm of Melrod, Redman & Gartlan.

According to Duffy's 35-page opinion, Dominion agreed to provide $35 million of the funding for the project after receiving a $175,000 fee for the promise. Because its legal lending limit set by federal regulators was only $18.5 million, Dominion arranged for Community Savings and Loan of Bethesda to provide the rest of the loan. Community, one of the casualties of the 1985 Maryland savings and loan crisis, has since been sold to Mellon Bank of Pittsburgh.

By 1984, however, Community had developed doubts about the loan and subsequently told the other parties that it was opposed to lending on hotel and casino projects for "moral reasons." Aware of Community's tenuous commitment to the project, Dominion sought to get out of the loan agreement, according to the judge.

"Recognizing the potential liability they were incurring, Walde and his underlings sought a cover-up," Duffy said

Walde subsequently hired Gorelick in order, the judge said, "to bully and intimidate the plaintiffs into delaying the loan until Community could be replaced, or failing that, to delay until ... . Dominion was released from its obligation."

Walde was unavailable for comment yesterday. Gorelick, an 18-year veteran of Melrod, Redman, declined to comment last night, saying he has not read the opinion. According to Duffy's ruling, Gorelick had said there were numerous problems with the loan and asked for further documentation. Dominion has contended that Penthouse never provided sufficient documentation for the loan, but the judge said evidence presented at the trial suggested that there was no basis for not proceeding with the loan.

At several points, Duffy questioned the testimony of Gorelick. Duffy stated, "During cross-examination, the crucible of truth, Gorelick continuously shifted uneasily in the chair, sweated like a trapped liar, and the glaze that came over his shifty eyes gave proof to his continuing perjury."

After trading was delayed several hours, Dominion Federal stock fell $5.75 a share, to $10.25 from $16, on volume of 6,200 shares.

Staff writer Stan Hinden contributed to this report.