BOSTON--Cambridge City Councillor William H. Walsh was sentenced to 18 months in prison yesterday for 41 counts of bank fraud and making false statements to the Dime Savings Bank of New York. Walsh was granted a stay pending appeal of his conviction.

Assistant U.S. Attorney Peter J. Mullin had asked for 36 months in prison, but federal Judge Mark L. Wolf handed down a lesser sentence because he said that Dime's policies encouraged the fraud.

"Dime Savings Bank virtually invited the commission of the crime," Wolf said.

Walsh was convicted of concealing second mortgages on loan applications submitted to the Dime Savings Bank, but Walsh and others contend that Dime knew about the second mortgages and did not care.

Wolf told Walsh during the sentencing that Dime's "egregious behavior" did not lessen Walsh's criminal responsibility.

"The misconduct of Dime Savings Bank does not excuse your offense legally or morally," Wolf said.

Walsh maintained his innocence in an interview yesterday and said he hopes to vindicate himself in an appeal.

"I'm going to fight and overturn this no matter what," Walsh said. "I'm the toughest fighter you've ever met."

Wolf said he took into consideration Walsh's "persistent perjury" during the trial.

"You lied, you caused others to lie, and you deliberately lied under oath," Wolf said.

Wolf said Walsh's motive was to prevent financial ruin in 1986 when one of his investments was in jeopardy.

When presented with a chance to raise the money by defrauding Dime, Walsh "accepted that opportunity immediately and without hesitation," according to Wolf.

Wolf said he also took into consideration Walsh's service to the community through his seat on the city council.

"I have probably never sentenced someone who has done so much for other people," Wolf said, citing the numerous letters he received from Walsh's constituents.

Councillor Walsh?

During the sentencing, Mullin cited a letter from the attorney general's office stating that Walsh will be required to forfeit his council seat because of his prison sentence, pursuant to state law.

But Walsh said he is likely to challenge the attorney general because he believes an official can retain office until the prison term actually begins.

He said his attorneys are in the process of examining the state law to determine if in fact he is required to relinquish his seat immediately, and that the issue is likely to go to court.

Cambridge City Solicitor Russell B. Higley issued an opinion in March that Walsh must resign upon sentencing, but said in an interview yesterday that it is the attorney general's jurisdiction.

He said he expects that if there is a possibility that Walsh will attend a city council meeting tonight about rent control that the attorney general's office will seek a restraining order.

Grounds for Appeal

Wolf granted Walsh his release pending appeal, citing several grounds that Walsh may have for obtaining a new trial.

One possible problem is whether the institution Walsh defrauded was in fact federally insured. His federal conviction depended on this assumption.

But in a similar case against an attorney who was accused of defrauding Dime, federal Judge Edward F. Harrington directed a verdict for the defendant on the grounds that he did not defraud a federally insured institution but its distinct subsidiary.

Wolf admitted, "The federally insured bank issue is an issue on which appeal could be based."

In addition, Wolf cited the fact that a juror was dismissed during deliberation as possible grounds for appeal.

Wolf said that the appeals process is likely to take at least a year.

Walsh said that these two issues would be central to his appeal, which he must submit within ten days.

"If Dime wasn't federally insured, there is no case," he said.

He also said he is prepared to question the grounds based on which the juror was dismissed.

Walsh also said he has discovered new evidence calling into question other aspects of the government's case.

He said that he has documents showing that his employees orchestrated Dime closings with second mortgages earlier than the employees testified that they knew about the bank.

Walsh said other documents prove that the 1986 financial emergency the prosecution used as his motive did not exist.

Walsh's three co-defendants were also sentenced yesterday by Judge Wolf.

A. Frances G. Schwartz, an attorney in Walsh's firm, was fined $20,000 and received 24 months probation and mandatory drug testing as prescribed by probation authorities. A. Eric Peach, a Dime loan originator, received 24 months probation, the first six months of which will be electronically monitored.

Ann Jarosiewicz, another Walsh employee, received a suspended sentence of one year probation and 100 hours of community service