PETERSBURG, VA. -- Convicted drug traffickers, bank robbers and Mafia members at the sprawling federal prison here are making their own contribution to the U.S. military force deployed in the Persian Gulf.

In a cable factory surrounded by barbed wire, the convicts are being paid up to $1.15 an hour to assemble Air Force jet fighter wiring parts and Marine Corps desert lighting kits -- items now destined for U.S. troops in the Middle East.

"We're supporting Operation Desert Shield," boasted Bill Stuby, assistant warden at the 1,100-inmate Federal Correctional Institution.

Once inmates did little more than stamp license plates or clean latrines. But convicts at the bustling $4 million factory here in the southern Virginia woods are part of the rapidly expanding work force of Unicor, a little-known government corporation that has revolutionized the concept of inmate labor in recent years -- and sparked a hotly contested Washington lobbying battle in the process.

Created by Congress 56 years ago to alleviate the "appalling idleness" of inmates in federal penitentiaries, the Bureau of Prisons-run Unicor puts prisoners to work at "productive," if low-paying, jobs making goods for other federal agencies: combat boots for the Pentagon, office furniture for the General Services Administration, Smokey Bear signs for the Park Service and hundreds of other items.

Over the past five years, the number of inmates working for Unicor has jumped 50 percent to 14,000. Fueled by an increasing diversity of product lines, sales have also increased, from $240 million to $360 million. Justice Department officials tout the growth as evidence that Unicor is a "government success story" that serves an important public purpose. But Unicor's booming business is also threatening to become its undoing, prompting a debate that has long-term repercussions for the nation's burgeoning prisoner population.

In the just-ended 101st Congress, business and union groups mounted a full-scale attack on Unicor, charging that the Bureau of Prisons is using cheap labor to undercut private industry -- and throw honest, taxpaying Americans out of work. "They're taking jobs directly out of the private sector,' " charged Kate Boyce, a lawyer for Patton, Boggs & Blow, the Washington law firm hired by furniture interests to spearhead the lobbying campaign against Unicor. "What they {the furniture companies} are saying is, 'Enough is enough.' . . . There's no reason {Unicor} should be taking over all of the federal office {furniture} market or all of the federal drapery market."

Although it has received little public attention, the debate over Unicor is symptomatic of the issues that increasingly confront federal and state correctional officials as they grapple with the consequences of the nation's toughening attitude toward crime and drugs. In recent years, that attitude has resulted in stringent new anti-drug laws, ever-longer sentences with no prospect of parole -- and staggering increases in the number of prison inmates.

This year, the total number incarcerated in American prisons and jails is estimated to have topped 1 million for the first time. In the federal prison system alone, the number of inmates has ballooned from 23,000 in 1980 to nearly 60,000 today, and it is projected to top 100,000 by the mid-1990s.

But in the eyes of many prisoner-rights groups and criminal justice experts, lawmakers have paid relatively little attention to what happens to the inmates once they are locked up. Unicor opponents, for example, have suggested that inmates be assigned to socially useful, noncompetitive jobs such as making teddy bears police can give to children.

"Do we really want these million people coming out without any training, without a skill that they can sell on the outside?" asked former chief justice Warren E. Burger, who has become one of Unicor's most ardent defenders. "One prison official told me that half of the people who come out of this prison couldn't even work in a filling station because they couldn't make change. What a hell of a thing for the most civilized society in the world."

Burger, who began taking an active interest in prison issues shortly after he was named chief justice by President Richard M. Nixon in 1969, emerged as a key player during the congressional debate on Unicor this fall. Late in the session, representatives of the International Ladies Garment Workers and other labor unions that had been meeting as part of the anti-Unicor coalition led by the furniture lobby persuaded Rep. Barney Frank (D-Mass.) to introduce an amendment to sharply restrict Unicor in four key areas: furniture, textiles, apparel and footwear.

After the Frank amendment passed the House as part of the omnibus crime bill, Burger fired off letters to House and Senate conferees labeling it an "astonishing proposal" that would be "an incredible setback to one of the most enlightened aspects of the federal prison" system. Sen. Strom Thurmond (R-S.C.), ranking minority member on the Senate Judiciary Committee, told conferees after receiving the letter that he would not accept the anti-Unicor amendment as part of the crime legislation. With that, the amendment died.

"My position on this is the most conservative one you can imagine," said Burger. "If you can take an individual and train him so he can do something a little more useful than stamping license places, he's a little less likely to go back {into prison}. . . . This isn't for the benefit of the criminal community. It's for the benefit of you and me."

With federal prisons already operating at 170 percent of capacity and new inmates arriving daily, officials say there is an even more pressing reason to continue expanding the program: It gives prisoners something to do.

"How long can you allow people to sit around with nothing to do? How long can that last?" said Patrick Whalen, chief warden here. "When you get inmate idleness, you get discontent, and that breeds rebelliousness . . . . If they burn this place down, it would cost $30 million to rebuild."

Such concerns are by no means theoretical. Since 1985, there have been 2,539 assaults by federal inmates recorded in the Bureau of Prisons' 43 facilities. More than 800 of those have been against staff members.

The prison here consists of two facilities -- a medium-security, fenced-in prison that at first resembles a somewhat drab college campus, and a minimum-security camp. In the medium-security facility, more than half of the 900 inmates have a history of violence. The average age is 37, the average sentence is 15 years -- and parole in federal prisons has been abolished.

"These people are doing some serious time," said assistant warden Stuby.

For administrators like Stuby, that makes it imperative that the inmates not be left with idle time. About 400 of them are assigned to routine prison maintenance, such as cutting grass or serving food in the cafeteria. But even in prison, these are seen as dead-end jobs and the pay ranges from 12 cents to 46 cents an hour.

The prized positions -- and the waiting lists -- are with Unicor.

"Without this, I'd be nuts," said John J. Lee, a convicted bank robber and former carpenter from Andover, Mass., who works as a remodeler at the Unicor cable factory. "You don't get too much self-esteem in a place like this . . . . At least in here, I can do something useful -- and not only for myself."

Next door to the the cable factory is a Unicor printing plant, where Lawrence Day, 32, works a press that churns out NASA newsletters and government wall calendars. When Day entered prison 14 years ago, he was a teenager convicted of armed robbery and manslaughter who had never worked a day in his life. Now, he said, "I've got a marketable skill. I've got something to look forward to when I get out of here."

Not all inmates are so enthusiastic. At the minimum-security camp, Unicor operates a factory that refurbishes used furniture. "It's a total waste of time," said Robert Lominac, serving a four-year sentence for mail fraud. Lominac, who stopped a reporter during a recent tour, said, "There's very little training involved in this. And how many used-furniture factories are out there anyway?"

Stuby later conceded the point. "I'd be the first to admit" that not all of Unicor's factories teach marketable skills, he said. "We're not selling that one as vocational training," he added. "We're selling it as a management tool: It keeps them occupied."