ATLANTA (AP) _ Two men were in custody today and three others were expected to surrender in connection with the illegal sale of two airplanes to Libya, which planned to convert the aircraft into in-flight fuel tankers, authorities said.

''It's the largest diversion of military equipment ever discovered to Libya,'' said Steve Hooper, the agent in charge of the Atlanta office of the U.S. Customs Service.

Franklin D.R. Corcoran of Pismo Beach, Calif., was arrested Wednesday, a day after a federal grand jury here indicted him and six other men, including two Libyan nationals believed to be in Europe.

Corcoran was being held at the Terminal Island federal prison near Los Angeles in lieu of $1 million bond, said prison spokesman Mike Benov.

Carl D. Lilly of Visalia, Calif., who was arrested in Hawaii on Tuesday, waived extradition proceedings Wednesday and was ordered returned to Atlanta.

Edward J. Elkins, David E. Baskett and Thomas J. Burnham, all of Santa Maria, Calif; were expected to surrender to federal authorities in Atlanta today, said acting U.S. Attorney Stephen Cowen. They were scheduled to appear before U.S. Magistrate Joel Feldman.

U.S. officials will seek to extradite Libyan nationals Abdulraheem M. Badir and Abdurrahmen M. Badi from Europe, said Cowen.

The seven defendants were allegedly negotiating with manufacturer Lockheed- Georgia Co. to buy two more planes for $60 million when the first diversion of four-engine propjets was discovered, the prosecutor said.

Neither Lockheed-Georgia Co. nor any of its employees were charged in the case, he said. Cowen said authorities took a ''hard look'' at the company's conduct and concluded there was insufficient evidence to charge anyone.

Lockheed-Georgia defended its conduct Wednesday.

''Lockheed-Georgia Co. complied with all U.S. government regulations in the original sale of the aircraft involved in this matter and ... cooperated fully with authorities since first being notified that the aircraft had been seen in Libya,'' the company said in a statement.

In February, President Reagan invoked a total embargo of American goods to the northern African nation. U.S. policy has forbidden the delivery of American aircraft or military equipment to Libya for several years.

There was no direct evidence that Libyan leader Moammar Gadhafi took part in the alleged plot, which involved dummy companies in Germany, Cowen said. However, Gen. Abu Bakr Younes Jaber, chief of the north African nation's armed forces, was named in the indictment as an unidicted co-conspirator.

The seven defendants are accused of purchasing two L-100-30's, the civilian equivalent of the C-130 military transport plane, and telling Lockheed and Washington the planes were to be used for oil exploration in the west African nation of Benin.

If convicted on all counts, each man faces up to 35 years in prison. The companies would face fines of as much as $500,000 or twice the gross gain realized on the sales, Cowen said.