WHEN BRIAN MULRONEY FINALLY stepped down in 1993, he was Canada's most unpopular Prime Minister in recent memory, and he quickly disappeared into an obscurity his detractors judged well deserved. But it turns out that an ungrateful nation had not heard the last from the man who occupied its highest office for nearly nine years. Last week Mulroney roared back into the headlines, filing a $37 million defamation lawsuit against the federal Justice Department once under his purview.

The suit, thought to be the largest libel action ever filed in Canada, has touched off a legal and political firestorm. It came in response to allegations by prosecutors that Mulroney was party to a scheme in which European aircraft manufacturer Airbus Industrie paid $20 million in kickbacks to win a $1.4 billion order from Air Canada. Intensive press inquiries, however, turned up little solid evidence against Mulroney, prompting charges that the ex-Prime Minister may be the victim of an elaborate prosecutorial fishing expedition.

Both Airbus and Air Canada deny that any bribes were paid in connection with the airline's 1988 purchase of 34 A320 jetliners. An outraged Mulroney issued a statement saying that the "false and reckless allegations made by the Department of Justice have the effect not only of damaging my reputation and my family, but also of besmirching and distorting the good name of Canada."

The controversy arose from an extraordinarily blunt letter mailed by Ottawa prosecutors in September to their counterparts in Switzerland. The 14-page letter, an edited copy of which was leaked to the Toronto Financial Post two weeks ago by an unknown party, outlines a "continuing conspiracy" in which Airbus is accused of funneling "commissions" to a dummy corporation in Liechtenstein, which then shifted the money to two Swiss Bank Corp. accounts in Zurich. According to the letter, one of the Swiss accounts, code-named Devon, was to benefit Mulroney, who is said to have received $5 million.

The letter asks that Swiss authorities make a search for the suspect accounts, which they have agreed to do, adding that "the investigation is of special importance to the Canadian government as it deals with criminal activities of a former Prime Minister." The document also mentions two military deals done with German firms during Mulroney's tenure and says that they too were greased with kickbacks. Those companies deny the charges.

At the time the Airbus bribes were supposedly paid, the Canadian air carrier was state owned; it has since been privatized. The Airbus sale was one of the European consortium's largest transactions with a North American carrier and was considered crucial to the company's future in the aircraft business.

Frank Moores, a lobbyist and Mulroney friend whom the Prime Minister appointed to the board of Air Canada in 1985, is said to have figured in all three alleged kickback schemes. He was later forced to resign when it was disclosed that his firm had been openly lobbying for Airbus. Moores worked with German-Canadian businessman Karlheinz Schreiber, according to the Justice Department letter, to arrange for the illicit payments and set up the Swiss bank accounts. Schreiber, who is being investigated by tax authorities in Germany, had nothing to say publicly about the Canadian allegations. Moores has not spoken, but his wife denied the charges.

Airbus representatives insisted that no gratuities were paid. "Our planes answered the airline's needs," said a spokeswoman in Toulouse, "and that's why they were bought. Beyond that, the rest does not concern us." At Air Canada, spokeswoman Nicole Couture-Simard maintained that the 1988 decision was made solely by the airline's board of directors: "We don't buy aircraft under political pressure."

How likely is it that Canada's former leader will be charged? The answer is uncertain, since Justice Minister Allan Rock refuses to discuss the details of the ongoing investigation except to say that he is searching for the source of the leak. But the government's handling of the matter and the shopworn nature of its evidence as described in the now famous letter have both come under withering attack, and not just from Mulroney's lawyers.

In a caustic editorial titled "What Kind of Case Is This?," the Globe & Mail, Canada's national newspaper, points out that many of the allegations contained in the September letter were drawn from press reports and a "confidential source," and that there is little in the document to suggest that the government has real proof.

Mulroney's attorney, Harvey Yarosky, said the former Prime Minister "categorically and unequivocally states that he had absolutely nothing to do with Air Canada's decision to buy Airbus, nor did he receive a cent from anyone." And if no indictment is handed down, lawyers say Mulroney's lawsuit could get a sympathetic hearing. The suit asks for $18.5 million in actual damages and an equal amount in punitive damages. Mulroney also demanded an apology and a retraction printed in 50 of the world's largest newspapers.

--Reported by Jeff Heinrich/Montreal