The investigation of military procurement practices became embroiled in political controversy yesterday when a senator charged that the Justice Department and Pentagon consistently "turned their backs" on evidence of defense fraud, and Attorney General Edwin Meese III defended the handling of the cases.

In a Senate floor speech and news conference afterward, Sen. Charles E. Grassley (R-Iowa) charged that Defense and Justice officials ignored evidence of massive procurement fraud in 1984 that would have "produced four years ago what we are just now beginning to see unfold."

Now, he said, "the public must be made aware of the fact that our Justice Department has been asleep at the switch."

Meese responded by calling his own news conference to contest what he termed "misinformation" by Grassley and others alleging that the department had been lax in going after defense fraud.

"We're very proud in the Reagan administration of our record of prosecuting defense procurement fraud, as part of the general crackdown ordered by the president on fraud, waste and abuse throughout the government," Meese said. "And this latest investigation is just one more example of the fine work that is being done by tough, experienced, professional prosecutors."

The dispute came as new details emerged about the origins of the probe into allegations that defense consultants bribed Pentagon officials to obtain inside information to help their contractor clients obtain lucrative military contracts.

A grand jury in Alexandria is to be impaneled today to review allegations in the case, and 275 subpoenas have been issued for documents and testimony beginning in mid-July.

Sources familiar with the investigation said it was launched in September 1986 when a former Navy employee working for a defense contractor received a call from a consultant offering to sell inside information.

"He was approached by a consultant who says, 'I understand you're interested in such and such a contract. I can help you with it' " by providing inside information, said one law enforcement source.

"He sees as a businessman that he can't afford to do this {buy information}, and he knows he's not going to get the contracts if he doesn't," the source said. The ex-Navy employee, whose name has not been disclosed, went to the Naval Investigative Service (NIS) and agreed to be recorded in his conversations with the consultant. NIS brought in the Federal Bureau of Investigation and the office of U.S. Attorney Henry E. Hudson of Alexandria.

After authorities confronted the still-unidentified consultant with evidence against him, he agreed to wear a "wire" in his conversations with other consultants, and the operation started to bear fruit. "That was the beginning of it," the source said.

By early 1987, investigators felt they had enough evidence to justify seeking wiretaps. According to federal court records, on Jan. 16, U.S. District Court Judge Albert V. Bryan Jr. granted wiretaps sought by William F. Weld, then head of the Justice Department's Criminal Division, who had to approve such requests. Bryan later granted 10 extensions of the initial 30-day request. In all, the taps lasted 290 days in 1987, picking up 4,764 conversations, of which 671 were deemed incriminating.

According to one law enforcement source, the original wiretaps were "initiated because of the quality of the initial information," including allegations against high-level government officials and consultants William M. Galvin and William Parkin.

"As it happened, the first {wiretap} opened a Pandora's box," the source said, leading to further wiretaps. "This thing steamrolled."

Law enforcement sources said there were about a dozen taps and at least one room bug, on the office of consultant Melvyn R. Paisley, a former assistant Navy secretary. They said the surveillance lasted through at least last Tuesday, when FBI agents searched the first of 38 locations and the massive, closely-held investigation first became public.

Grassley -- who has said the case "goes beyond our wildest imagination" -- began his speech on the Senate floor by recalling the scene from the movie "Casablanca" in which the police chief, just before he is handed his gambling winnings, feigns shock that gambling is taking place in the back rooms of Rick's Cafe.

There is a perception in the country, Grassley said, that "many of our government officials are like the French chief of police in that scene in 'Casablanca.' "

Citing a well-publicized 1985 case involving GTE Corp., Grassley said Defense Department investigators received "numerous allegations as well as hard evidence" of other cases of consultants illegally providing government documents to defense contractors but that Defense and Justice officials "turned their backs."

Meese adamantly denied that assertion. "Investigating and prosecuting defense procurement fraud has been one of the department's top priorities for several years," he said at his news conference, where he was joined by Hudson and acting Criminal Division chief Edward S.G. Dennis Jr.

Since 1985, Meese said, there have been 43 prosecutions, 35 convictions and more than $32 million recovered by Justice's defense procurement fraud unit, set up in 1982, and by U.S. attorneys.

Meese said the case will not affect the November election campaign, in which ethics and "sleaze" have become major issues.

"I don't think it will have any political fallout since it was this administration that discovered the offenses . . . . The people involved are relatively lower-ranking people in the defense hierarchy . . . . Beyond that it is this administration that is vigorously pursuing the investigation and will be vigorously prosecuting those against whom there is the evidence," he said.

Law enforcement sources have said that a central figure in the probe is Paisley, a key procurement official from 1981 to 1987 under former Navy secretary John F. Lehman Jr. The investigation has also turned up evidence that Lehman may have tipped off Paisley about the probe, the sources said.

Hudson, who canceled a planned trip to a branch office in Norfolk yesterday to be at the news conference, stood up for his boss. "Let there be no question that in this case the Department of Justice rendered crucial assistance to my office," he said. "From the very inception of this investigation the Department of Justice afforded this case very highest priority."

Grassley said on CBS News' "Face the Nation" Sunday that "if central Justice here in Washington, D.C., stays out of Henry Hudson's way, I think there will be vigorous prosecution."

Yesterday Grassley distributed copies of congressional testimony prepared in 1985 by Robert L. Segal, a former investigator for the Pentagon's Defense Criminal Investigative Service (DCIS).

Segal was the lead agent on the GTE case, in which the company, two officials and a consultant were charged with illegally trafficking in classified and confidential Navy budget documents. GTE pleaded guilty in September 1985 to improperly obtaining classified documents, paying $590,000 in fines and penalties. The case against the consultant, Bernie E. Zettl, is pending in federal court in Alexandria. Charges against the two officials were dropped.

In testimony prepared for delivery on Oct. 1, 1985, before the Senate Judiciary subcommittee on administrative practice and procedure, then headed by Grassley, Segal said that "GTE is but the tip of the proverbial iceberg," and that DCIS had evidence of similar wrongdoing by 25 other companies.

Many companies, he said, appear to have "espionage units" to obtain copies of classified documents to get a competitive edge over rivals in the bidding process. "Yet, we had to drag the {defense procurement fraud unit} and the Justice Department kicking and screaming toward indictments and prosecution."

The unit, he said, "has lost the respect and earned the disdain of . . . most every DCIS . . . agent."

Other DCIS agents supported Segal's contentions. According to a former DCIS supervisor interviewed recently, at the time of the GTE case investigators had found "an endemic problem . . . DOD employees were providing information to contractors and consultants in exchange for various benefits. The benefits varied depending on the interest of the individual. In some cases, it was direct remuneration and in others, jobs down the road."

"From GTE, we expanded . . . . We identified people in the Pentagon as leakers. We had payments of one kind or another. We had people from companies coming forward and saying, 'I have to log this classified information and I can't account for how it was obtained and my superiors are telling me not to log it.' We were being told it was being brought in by colonels, by employees at the Pentagon. But we couldn't get any interest to follow up."

The former DCIS officials cited inexperienced prosecutors, lack of commitment to lengthy, complicated cases, and some fear of confronting the high-powered, big-money attorneys hired by defense contractors. "They didn't want a case where there was any chance of losing," one said.

Segal said in an interview last night that there was no "conspiracy" to protect defense contractors. Justice's failures, he said, were due to incompetent prosecutors who also looked down on investigators.

Meese said the information passed along by Grassley consisted of a Wall Street Journal article about possible use of confidential data by defense contractors. "That was turned over to the Criminal Division and they did pursue it assiduously," Meese said. "I can assure you that at no time has this department had to be dragged into any indictment in which the evidence was there," he said.

Another source with experience in prosecuting defense fraud cases disputed the former DCIS officials' account. "What I've seen is people saying, 'Take them on,' " the source said. As to why other prosecutions similar to the GTE case have not been brought, the source said, "These are not easy cases. It sounds like it's easy. But unless you've got people talking on wires, if you've got a historical case where all you have is somebody who's got the material {he is not authorized to have}, they're much more difficult to prosecute."

Deputy Assistant Attorney General Victoria Toensing, who supervises Criminal Division prosecutions of defense fraud cases, cited the GTE case as an example of the department's interest in going after consultants and companies that illegally obtain inside information.

"That's what the GTE case is all about," she said. "We were on the cutting edge of the law then, and you can tell that because it's on its second appeal and it hasn't been to trial."

Staff writers Helen Dewar and R. Jeffrey Smith contributed to this report.