Outdated investment restrictions including a limits on shares of railroad and telegraph companies have cost New York state’s pension fund $1.3 billion over the last decade, according to state Comptroller Alan Hevesi.

Mr. Hevesi wants to change that by scrapping the “legal list” that outlines what can be invested in and how much can be invested in the $120 billion fund. In its place, the comptroller wants to be held to a standard of “prudent investor.”

“The best way to deal with the ups and downs of the financial markets is to diversify, but now our ability to achieve the optimum diversification is artificially limited,” said Mr. Hevesi, a first term Democrat.

Mr. Hevesi continued, “We should make investment decisions the way most other large pension funds do – based on the best views of financial experts, not predetermined legal limits.”

For example, the state law restricts investment to no more than 5 percent in real estate. While the stock market eroded beginning in 2001, eventually costing the pension fund nearly $30 billion, the real estate market still prospered. But Mr. Hevesi, and Comptroller H. Carl Mc-Call before him, had to reduce investments in real estate as the overall value of the fund shrunk, said a spokesman for Mr. Hevesi, David Neustadt.

The proposal follows decades of actions by past comptrollers to loosen the limits created by the state Legislature to protect the fund from over reliance in the stock market.

“Absolutely, Comptroller McCall did believe more flexibility was needed given the way the markets and the number of markets have changed since the rules were first established,” said a former aide for Mr. McCall, Steven Greenberg, who now runs his own public relations firm.

Mr. Hevesi said California, Texas, New Jersey, and Wisconsin use the “prudent investor standard” for at least some of its public pension funds. Spokesmen for Treasurer Phil Angelides, Mr. Hevesi’s California counterpart, did not immediately return calls seeking comment.

The Council of Institutional Investors, a group of 140 of the larger corporate and public pension fund managers in the nation, could not identify any trends among states and the need for investment flexibility.

Mr. Hevesi has sent his proposal to the state Legislature and Governor Pataki.

Mr. Hevesi has been in conflict with the Legislature and governor in recent years as they sought to limit the contributions required of local governments into the pension plan for their employees when Wall Street investments performed poorly.

The investments were suspended when Wall Street was hot in the late 1990s, but government contributions now are being blamed for local tax increases. Mr. Hevesi had refused to reduce the local government contributions, saying he had a legal responsibility to protect the fund.

There are nearly 1 million current and former employees enrolled in the state’s local and state government retirement system.