Former FBI agent John J. Connolly Jr., who handled fugitive mob informer James "Whitey" Bulger, was arrested today after he was indicted by a federal grand jury on five counts of racketeering, conspiracy and obstruction of justice. Bulger and another reputed member of Boston's infamous Winter Hill Gang also were indicted, federal prosecutors said.

Connolly, who pleaded not guilty and was released on a $200,000 unsecured bond, is a onetime star FBI agent at the center an imbroglio that began in 1995 as a simple racketeering and extortion indictment against two local mobsters. Testimony in the ongoing case, however, uncovered allegations of criminal activity by FBI agents who had befriended gangsters, severely damaging the reputation of the agency's Boston field office and prompting the Justice Department to revamp its guidelines for handling informers.

Also charged in the indictment were Bulger, who has been on the lam since January 1995 and recently was placed on the FBI's list of the 10 most-wanted fugitives, and Stephen J. "The Rifleman" Flemmi, who is in jail awaiting trial on related charges. But Connolly, who registered and supervised them as confidential informers, stands out either as an infidel who betrayed the cause of justice, according to prosecutors, or, as he sees himself, the fall guy for the feds.

"This indictment does not allege sloppy bookkeeping or the failure to write the perfect FBI report," said U.S. Attorney Donald K. Stern. Connolly "violated the trust that the people placed in him and the trust when he took his oath of office."

Barry W. Mawn, FBI special agent in charge of New England, apologized for Connolly's alleged violation of that trust. "I am certainly on the one hand saddened, but on the other I'm angered," Mawn said. "I have apologized to law enforcement for these activities . . . and I extend that apology to the public."

Connolly, however, has maintained that his handling of informers was done with the full knowledge, direction and approval of his superiors at the Justice Department.

"John Connolly is being made a scapegoat because the FBI is embarrassed by their policies and, as a result, they are looking for someone to isolate and use as a vehicle for blame," said his attorney, R. Robert Popeo. He added that Connolly's arrest at home and the timing of the indictment--coming three days before Christmas--had "a tinge of mean-spiritedness."

Prosecutors maintain that Connolly, during and after his stint as an FBI special agent from November 1968 to December 1990, helped the reputed mobsters in a racketeering enterprise that included illegal gambling, loan-sharking, extortion and bribery. He also is accused of compromising a court-authorized wiretap investigation, alerting confidential informants about their pending indictments so they could flee, falsifying FBI documents and failing to report serious crimes in order to illegally protect the informants from prosecution.

According to the indictment, the bribery charges stem from gifts and cash payments worth $6,000 made by the reputed mobsters to Connolly's former supervisor, former special agent John Morris. Morris, who was granted immunity, testified against Connolly in pretrial hearings last year. Those hearings resulted in two organized crime figures pleading guilty to murder charges in exchange for lesser sentences.

Prosecutors declined to say today whether additional indictments are expected as part of an ongoing investigation by a special Justice Department task force.

CAPTION: Ex-FBI agent John Connolly pleaded not guilty and said his superiors knew of and approved his actions.