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The Franklin child prostitution ring allegations began in June 1988 in Omaha, Nebraska and attracted significant public and political interest until late 1990, when separate state and federal grand juries concluded that the allegations were unfounded and the ring was a "carefully crafted hoax."

Omaha Tales of Sexual Abuse Ruled False.

A Federal grand jury concluded today that stories of sexual abuse and drug trafficking that swept this city and the state capital after the failure of a credit union here were unfounded.

The grand jury indicted Alisha Owen, a 21-year-old woman who had told a legislative committee that she was a victim of sexual abuse. She is charged with eight counts of perjury.

Shortly after the failure of the Franklin Community Credit Union in November 1988, there were widespread allegations, repeated by legislative leaders, that money from the union had been used to finance child prostitution.

The same grand jury last year indicted Lawrence E. King Jr., a prominent Republican who was manager of the credit union, on 40 counts of conspiracy, fraud and filing false tax returns in connection with the failure of the institution in November.

The Federal grand jury today indicted an officer of the credit union, Sandra Prucha, charging that she used expense vouchers to obtain cash and credit, then used the cash and credit for her personal use.

Omaha Grand Jury Sees Hoax in Lurid Tales.

Lurid reports of child sex abuse, drug trafficking, pornography and political intrigue that have held Omaha enthralled for nearly two years were a ''carefully crafted hoax,'' a county grand jury in Nebraska has concluded. But two other inquiries are continuing, and the Nebraska State Senator who heads one of them has raised questions about the grand jury's conclusions.

The report this week said the hoax, involving allegations against some of Omaha's more prominent citizens, was ''scripted by a person or persons with considerable knowledge of the people and institutions of Omaha.''

The grand jury did not identify those suspected of engineering the hoax. But it did indict two witnesses who it said had given perjured accounts in the tangled case, involving a failed credit union formed to help the poor that was headed by a nationally prominent Republican.

'A Strange Document'

State and Federal inquiries into some of the same matters are continuing, and the Nebraska Senator who heads the state's investigation, Loran Schmit, labeled the grand jury's report ''a strange document.''

''That is the kindest thing I can say about it,'' he said.

An Assistant United States Attorney, Thomas Talken, who heads the Federal inquiry, said it would continue to examine some of the same matters studied by the county panel.

The rumors about child sex abuse, drug trafficking and other offenses began to circulate in late 1988 shortly after the failure of the Franklin Community Federal Credit Union, which was headed by Lawrence E. King Jr., a former vice chairman of the National Black Republican Council, an affiliate of the Republican Party, who has entertained generously at Republican national conventions. He has been indicted on charges of embezzling money from the credit union, which closed in November 1988, but a Federal magistrate has ruled that he is not mentally competent to stand trial at this time.

The rumors gained further attention last year after a former State Senator, John De Camp, wrote a memorandum naming five prominent individuals as ''central figures'' in the state's investigation.

The grand jury exonerated the five, saying, ''We found no credible evidence of child sexual abuse, interstate transportaion of minors, drug trafficking or participation in a pornography ring.''

The grand jury quoted Shakespeare's King Henry IV: ''Rumor is a pipe, blown by surmises, jealousies, conjectures and of so easy and so plain a stop that the blunt monster with uncounted heads, the still discordant wavering multitudes, can play upon it.''

'Rumor and Innuendo'

Though it made no formal accusation, the grand jury said it suspected that a state investigator looking into the sexual allegations had been duped by a executive who had been dismissed by Boys Town, the home for troubled young people in Omaha. It said the unemployed executive, identified as Michael Casey, might have ''fueled the fire of rumor and innuendo'' because of personal grudges.

Among the rumors swirling around the affair was one that Mr. King had abused young people from Boys Town. At least some of the five prominent people named by Mr. De Camp had either supported the cause of Mr. King's credit union or attended some of the lavish parties he frequently gave.

The two witnesses who were charged with perjury were a young man and a young woman who had said they were victims of abuse when they were teen-agers. They were indicted after two other witnesses, who had supported their accounts, recanted. The two who were indicted are now serving jail terms for unrelated offenses. They were identified as Alisha Owen, 21 years old, and Paul A. Bonacci, 22.