Final Iran-Contra Report Faults Reagan and Bush : Probe: Prosecutors charge that top aides covered up scandal with a false account of events, sources say.

Iran-Contra prosecutors have concluded that former President Ronald Reagan created an atmosphere that allowed the arms-for-hostages scandal to flourish and that former President George Bush was not, as he has claimed, uninformed about the affair while serving as Reagan’s vice president, sources said Saturday.

Independent counsel Lawrence E. Walsh’s final report on his investigation, which stretched over seven years and cost $35 million, blames Reagan’s top aides for engineering a successful cover-up of the 1986 scandal, according to sources who have seen the document.

The report, expected to be made public later this month, alleges that Reagan set the stage for top aides--principally then-Atty. Gen. Edwin Meese III--to compose a false account of events that shielded high-ranking officials from accountability in the scandal.

Bush, according to these sources, is accused of lying when he repeatedly claimed he was “out of the loop” in top-level deliberations about the deal, in which U.S. arms were shipped to Iran to free American hostages in the Mideast. The report describes him as fully aware of the initiative, the sources said.

Attorneys for Reagan and Bush disputed Walsh’s allegations. Meese could not be reached for comment on Saturday.

The scandal involved the Reagan Administration’s secret arms deals with Iran in 1985 and 1986 at a time when the United States officially was trying to prevent other countries from aiding the terrorist regime.

Subsequently, the White House secretly used profits from the arms sales to finance military aid for anti-Sandinista rebels in Nicaragua, who were known as Contras. Congress had specifically banned aid to the Contras at that time.

Reagan always insisted that there was no connection between Iranian arms sales and the later release of some American hostages in Lebanon--and that he never knew about any diversion of funds to the Contras.

But sources said Walsh’s report concludes that these statements were inaccurate and led top aides and members of Reagan’s National Security Council to protect him by shifting blame for the scandal to lower-level presidential assistants--including Oliver L. North and former national security advisers Robert C. McFarlane and John M. Poindexter.

North and Poindexter were convicted of felonies in the scandal after jury trials, and McFarlane pleaded guilty to four misdemeanors. The convictions of North and Poindexter were later reversed when an appellate court found their protections against self-incrimination had been violated.

“Walsh initially proceeded on the theory that North was an errant cowboy for helping arrange the arms sales and diverting profits to the Contras,” one source familiar with the report said.

“But the report shows Walsh later came around to see the version that North told--that North never did anything without the full approval of his superiors. And McFarlane, after initially denying any knowledge, later supported that same version.”

A three-member panel of appellate judges, which appointed Walsh as special counsel in 1986, on Friday cleared his report for publication. Individuals named in the document, or their attorneys, were first allowed to read it, and they were given four months to respond. The judges said the document could be released soon, with possible minor deletions.

Theodore B. Olson, Reagan’s Washington-based lawyer, said he was forbidden by court order from commenting on Walsh’s conclusions until the report has become public. But he said any conclusions critical of Reagan would be “completely unwarranted and utterly irresponsible.”

Olson said the evidence “shows that President Reagan complied with all laws and at all times directed his subordinates to do likewise.”

Griffin B. Bell, a former attorney general in the Jimmy Carter Administration who has represented Bush, insisted Bush had been truthful about his role and denied that he had misled the public. He said Bush “never denied he knew of weapons sales to Iran” but did not know about diversion of funds to the Contras. He said Walsh “ought to just fold his tent.”

Other attorneys for principal figures who were reached for comment said court rules prohibited them from commenting before the document is released. They said their own written responses would be made public at that time.

One legal authority who spoke on condition of anonymity said he questioned the fairness of Walsh ascribing criminal conduct to anyone whom he did not indict during his seven-year probe.

But sources said the report claims that the alleged cover-up was so successful that key evidence was kept out of Walsh’s hands until last year, too late for prosecuting some people because of the statute of limitations, which generally is five years.

Reagan is criticized for setting the stage for the illegal activities of others by his disclaimers of knowledge of key events and his determination to help the Contras despite a congressional ban on military aid, known as the Boland Amendment.

Regarding Bush’s role as vice president, the report is understood to cite a note written by former Defense Secretary Caspar W. Weinberger in 1986 that Walsh did not obtain until last year. The note, made public in connection with Weinberger’s 1992 indictment, confirms that Bush was present at a White House meeting at which the hostage deal was discussed in some detail, and says that Bush supported the swap even though Weinberger and then-Secretary of State George P. Shultz argued against it.

The report accuses Weinberger of deliberately concealing his notes taken at National Security Council meetings, including the note concerning Bush. The report is also said to rebuke Bush for granting full pardons last Christmas Eve to Weinberger and five other former government officials, an act that wiped out prosecutions still pending in the Iran-Contra case.

At the time, Walsh issued an angry statement accusing Bush of “misconduct” and declared that the pardon was part of a cover-up that “has continued for more than six years.”

Robert S. Bennett, an attorney for Weinberger, said his client “is innocent of all charges, and any allegations to the contrary are simply false and are the private judgment of Mr. Walsh’s conspiracy-prone imagination.”

“The American taxpayers have paid a fortune for a work of fiction,” Bennett said.

In November, 1986, when Reagan made his first detailed public statement about the scandal, he introduced Meese on national television to present the findings of an internal inquiry on the Iranian arms sales and diversion of profits to the Contras.

Sources said Walsh’s report alleges that Meese presented a false account of key events to protect Reagan from any public criticism.