A 1996 Supreme Court decision resolving an arcane dispute over the savings and loan crisis has mushroomed into a financial nightmare for the federal government, feeding a vast array of lawsuits that the Justice Department warns could cost tens of billions of dollars.

In United States v. Winstar Corp., the court ruled that three troubled thrifts were entitled to compensation after the government reneged on complex deals promising to help them regain their financial health through favorable regulatory treatment. Two years later, the Justice Department is furiously battling 125 other Winstar-style lawsuits filed by S&Ls and investors, and recently estimated that damages in those cases could reach $32 billion -- about six times what the government expects to spend fixing its Year 2000 computer glitches.

But the thrift cases are only part of the government's problem. The Winstar decision was the Supreme Court's most forceful affirmation that the government can be held liable when it breaches a contract. Although the ruling applied only to S&Ls, lawyers are now invoking the Winstar precedent in hundreds of additional lawsuits, claiming the government has backed out on deals in areas stretching from subsidized housing to nuclear waste to satellite launches.

Anxious to limit the sweep of the precedent, the Justice Department's civil division has asked Congress this year for an additional $64 million -- nearly half the division's entire budget -- just to litigate the thrift cases. The department had never made a request that large, but it had never faced potential liabilities this large.

"This is the largest family of cases we've ever had, and I've never seen dollars like this at stake," said Deputy Assistant Attorney General Stuart Schiffer, a 35-year Justice veteran who heads the civil division's commercial litigation branch. "The money is so huge, you get kind of numb. . . . Whenever I read about the budget surplus, I just think: Here it is."

The civil division has assigned an army of 50 attorneys to fight the thrift cases; many of its recent hires have been routinely classified as "Winstar lawyers." But while the S&L cases are the division's priority for now, its post-Winstar struggles are just beginning:

This year, several nuclear utilities have filed Winstar-style lawsuits arguing that the government has broken its promise to open a national nuclear waste dump by January 1998, while forcing the industry to contribute to the federal Nuclear Waste Fund. The industry's Nuclear Energy Institute predicts that all 103 of the nation's nuclear plants will eventually sue for damages of between $31 billion and $53 billion.

In the massive deregulation of the electricity and telecommunications industries, utilities are demanding compensation for enormous "stranded investments" they say they made after receiving government assurances that they would be protected from competition. Some have filed lawsuits. Others have used the threat of lawsuits to persuade state lawmakers to award them billions of dollars in surcharges.

More than 600 developers of low-income housing have sued the federal government, arguing that Congress broke its promises to them by rewriting a War on Poverty housing program in 1987. Federal claims court judges have issued conflicting opinions in the cases, so a federal appeals court is scheduled to decide a test case involving about 30 developments this year.

After the space shuttle Challenger explosion in 1986, the government abruptly canceled its contracts to launch commercial satellites from the space shuttle, leaving firms to find new satellite delivery systems. This led in part to the deals to launch American satellites aboard Chinese and Russian rockets. In a trial that ended in May, a subsidiary of Hughes Electronics Corp. argued that under Winstar, it was entitled to $350 million for lost profits and other damages from its scuttled contract. A decision is expected soon.

No one knows how many of these cases will succeed. But the Justice Department is desperate to keep the precedent as narrow as possible, as its request to Congress made clear.

"Wow. If they want $64 million just to litigate the S&L cases, that's a breathtaking indication of how seriously they take this," said William Kovacic, a government contracts professor at George Mason University School of Law. "But it makes sense, because there could be hundreds of billions of dollars at stake. The potential liability is just astronomical."

The key holding of the Winstar decision -- that even for the government, a deal is a deal -- presents more than a financial challenge. It also raises questions about how federal agencies should navigate their dual roles as regulators and deal-makers, and when Congress can change policies enshrined in contracts. The Winstar cases have also sparked debate about the litigation strategy at Justice, with critics accusing the department of continuing to fight cases that have effectively been decided in an effort to save taxpayer dollars.

Still, money is the main issue. "Winstar is a profound case, and it says wonderful things about the rights people have in this country," said Washington attorney Melvin Garbow, who represents several thrifts and nuclear utilities. "And yes. It means a lot of money too." Crisis Prevention Roots

Winstar was a child of the 1980s, a product of the federal government's early efforts to avert a full-blown crisis at a time when many S&Ls were starting to founder.

In the beginning, federal agencies overseeing the industry encouraged solvent banks and other well-heeled investors to take over failing thrifts, promising the buyers exemptions from the normal capital requirements through an accounting gimmick called "supervisory goodwill."

In these deals, the buyers were assured that they would be able to count the insolvent thrifts' liabilities as a form of capital, so they would have some breathing room to bring the banks back to financial health. These inducements eased the way for a host of "supervisory mergers," some financed by well-known businessmen such as Revlon Chairman Ronald O. Perelman, Hyatt CEO Jay Pritzker and former Salomon Brothers bigwig Lewis Ranieri.

But high interest rates continued to batter the thrifts, so in 1989, Congress enacted a sweeping S&L overhaul called the Financial Institutions Reform, Recovery and Enforcement Act. The law authorized a $145 billion rescue for the industry, but it also established tough new accounting rules to prevent the need for future rescues. One rule was: No more supervisory goodwill. Suddenly, many of the newly merged thrifts were technically insolvent because they were well below the new capital requirements. Others were forced to scale back their operations and inject millions of dollars in new capital to stay afloat.

The result was a billable-hours bonanza, with about 130 merged thrifts filing lawsuits insisting that the government should have to pay for busting their deals. The Justice Department countered that the government should be immune from liability for its "sovereign acts," that it needs the flexibility to change decisions for the benefit of all Americans. The Supreme Court finally agreed to hear the cases of three thrifts: Winstar Corp. of Minnesota, the Statesman Group of Iowa and Glendale Federal Bank of California.

In July 1996, the court ruled for the S&Ls in a 7 to 2 decision, ordering the federal claims court to set damages. Justice David H. Souter wrote that "it would . . . have been madness" for the thrifts to enter the supervisory deals knowing that the government could break its contracts at will. "The very existence of their institutions would then have been in jeopardy from the moment their agreements were signed," he wrote.

Judges have always balanced the right of private contractors to hold government to its word with the right of the government to act as it sees fit, but Winstar has clearly tipped the balance toward the contractors. The question is, how far? Some analysts see the ruling as a firm but narrow one upholding the sanctity of clear contracts in the S&L world, but leaving open the possibility of government immunity in many other situations. But some legal experts and -- not surprisingly -- most plaintiff lawyers say it heralded a broad shift in contract law, dropping the government from an exalted perch to the level of any private citizen.

"It's an incredibly important decision," said Washington attorney Charles Cooper, who represented Winstar and is now preparing similar breach-of-contract cases on behalf of electric utilities and local phone providers. "It makes it clear that the government has to honor its contracts, just like you and me. It can't just say, Hey, we're the government.' " Hellbent to Settle'

Of the 130 original S&L lawsuits, the Justice Department has now settled with four small thrifts (including Winstar and Statesman) for a total of $133 million, but it has continued to fight the others in a fierce effort to limit the dent to the Treasury. One key test will come this fall, when the federal claims court decides what damages to award the much larger Glendale, which is seeking more than $1.5 billion and has been unable to reach a settlement with Justice. An additional 11 thrift cases are scheduled for trial in December.

Schiffer insisted that many of the outstanding lawsuits have subtle differences with Winstar and vowed to continue litigating on a case-by-case basis. Many of the thrifts have made wildly inflated estimates of "lost profits" and other purported damages, he said, and it would be irresponsible to cave in to their demands. He acknowledged that the handful of early settlements have been expensive, but not as expensive as the S&Ls had hoped.

"We're hellbent to settle, but we're not going to lie down and give the plaintiffs everything they want," he said. "We're trying to save taxpayers billions of dollars."

But plaintiff attorneys accuse the department of adopting a win-at-all-costs, stall-whenever-possible strategy despite unfavorable court rulings. In a blistering opinion last December, chief federal claims Judge Loren Smith agreed, urging the department to settle these cases. In a judgment for several thrifts that said their cases were virtually identical to Winstar, Smith blasted the department's arguments that there were significant differences as "totally incredible" and "bizarre," at one point dismissing them as no more plausible -- and less entertaining -- than arguments that the banks had been kidnapped by UFOs.

"Because the dollars at stake appear to be so large, the government has raised legal and factual arguments that have little or no basis in law, fact or logic," Smith wrote.

The department's next hurdle will be persuading courts not to apply Winstar outside the banking industry. For example, under a 1982 law, the nuclear industry has paid $14 billion into a government fund that was supposed to pay for an underground dump. It hasn't happened, so the plants have stored their own waste. To their attorneys, that smells like Winstar.

"This is the big one, and it's the same principle," said Washington lawyer Jerry Stouck, who represented Glendale in the original Winstar case and now represents several nuclear utilities. "They made a promise. They broke their promise. Now they have to pay."

Not all analysts agree. Winstar involved a straightforward contract; some of the promises embedded in nuclear policy are less clear-cut. In many of these cases, the crucial question is whether the courts will consider a breach of promise equivalent to a breach of contract.

"Business seems to think that Winstar is their universal solvent, but that may be wishful thinking," said Joshua Schwartz, a professor at George Washington University School of Law who has written two law review articles about Winstar. "There's a ton of money at stake here. It's not going to be easy."

One hint could come later this year, when the U.S. Court of Appeals in Washington settles a convoluted legal battle in the housing arena. The dispute involves a much-maligned program that allowed developers of "expiring-use" projects to prepay their federally subsidized mortgages and charge market rents after 20 years. As the 20-year mark approached in the mid-1980s, there were widespread fears that prepayments could force as many as 300,000 families out of affordable housing, so Congress changed the rules to prohibit prepayments.

Now the developers say they have obvious Winstar cases: Congress promised them the right to prepay as an inducement to build, then took the right away before they could exercise it. But Justice has seized upon a novel argument: The developers signed the actual contracts with mortgage lenders, not the government, so they have no right to sue under Winstar. "If the government didn't sign the contract, the government can't break the contract," one prosecutor said.

Charles Edson, a Washington attorney who is representing 70 expiring-use developers in lawsuits, said that argument defies common sense. "Everyone knows the government broke its promise," Edson said. "Their argument is just, Nyah, nyah, we didn't sign the contracts.' "

The contractual question could loom equally large in utility deregulation cases, with even more dramatic financial implications. Now that most states are introducing competition into the electricity industry, utilities nationwide are seeking to recoup about $200 billion from ratepayers for "stranded investments" they made in the monopoly era, when they were required by law to serve all citizens. And local telephone providers are making similar arguments in the wake of the monopoly-crumbling Telecommunications Act of 1996.

Again, though, there is no guarantee that the Winstar decision will seal their cases. Some analysts believe judges will be reluctant to award damages unless the utilities can prove the government reneged on actual contracts, as opposed to implied promises. And it is by no means clear that Winstar applies to state governments, which are overseeing electricity deregulation. "In issues like this, Winstar could be a bit of a mirage," Kovacic said.

But the utilities are discovering that even the threat of a Winstar case can drive public policy, as many states have assured them full recovery for their stranded investments in an effort to avoid protracted litigation. In Pennsylvania, Cooper recently hashed out a $5.5 billion settlement for a Philadelphia utility, and gives much of the credit to Winstar.

"The utilities are acting like a kid with a new toy," said Con Hitchcock, an attorney for the consumer group Public Citizen.

There is a political backdrop to these cases, as a parade of developers, investors, shareholders and bankers try to claim billions of dollars from the American people. But they say their claims would not be so huge if the government had not treated them so badly. David Noble, the former CEO of Statesman, battled for nine years after the government suddenly seized the thrift it had begged his company to buy just a year earlier. Statesman finally settled a few months ago for $39 million.

"I'm sure people think we're greedy, but we had a clear, concise, crisp contract, and they broke it," he said. "The government just destroyed everything we had worked for, but they wouldn't admit that."

The battleground may soon spread to Congress, where several plaintiffs are already urging legislators to oppose Justice's unprecedented $64 million request for contesting Winstar cases. But in the halls of Justice, officials are convinced that a big public payout for litigation now will save an even bigger public payout for damages down the road.

"It's like the old saying about a few billion here, a few billion there," Schiffer said. "This is real money." CAPTION: David Noble, former CEO of the Statesman Group of Iowa, fought the government after it reneged on an S&L deal.