The Supreme Court agreed yesterday to hear a challenge to the 60-year-old practice under which directors of banks, their parents and insurance companies serve on each other's boards. The institutions said the case could upset billions of dollars worth of investment decisions.

The Justice Department brought a test case seven years ago against three of the nation's most powerful banks and their parents, three of the four largest insurance companies, and a fourth company that shared some of the same directors, a practice known as interlocking directorates. The government claimed that such closeness violated Section 8 of the Clayton Act, which for antitrust reasons prohibits competing companies from sharing directors.

The case turns on a phrase in the act prohibiting the sharing of a director in any two or more corporations "other than banks." The banks and insurance companies, led by BankAmerica Corp., agreed with a U.S. District Court's interpretation that both corporations sharing a common director must be "other than banks" to be prohibited from such an arrangement. Because the challenged interlocks involved only one corporation other than a bank, the arrangement wasn't prohibited by law, the court said.

However, the Justice Department and the 9th U.S. Circuit Court of Appeals said the phrase "other than banks" referred to treatment of banks and banking institutions' interlocking directorates in other paragraphs of the section. Congress intended the act to foster competition by prohibiting the sharing of directors among large competing corporations, the Justice Department and the appeals court said.

In addition, the Justice Department said the banks and insurance companies already had agreed that they were in competition "in the extension of mortgage and real estate loans and that such competition is not insubstantial," thereby violating competitive tests of the act.

For example, the Justice Department said in court documents that outstanding real estate loans of the three banks totaled $6.5 billion and those of the four insurance companies totaled $32 billion.

The banks and insurance companies argued that 40 percent of insurance company directors are also directors of banks, and that this has been a common practice for the last 60 years. The relationships were not secret, and during that time no federal agency challenged the practice, the banks said. The case is the first of its kind to be decided at an appellate level, the Justice Department said.

Banks and insurance companies need the practice to maintain high levels of financial and industrial experience on their boards because "the funds of millions of individuals have been entrusted" to them, the institutions said in their briefs.

Because the companies invest billions of dollars annually, their directors are important, the institutions said. If the pool of possible directors "dries up" as a result of an adverse decision, "The effect upon insurance companies, banks and bank holding companies will be substantial," the institutions said in court papers.

In another case, the court let stand a law requiring all containers of 100 percent Florida grapefruit juice to show the state's name or "sunshine tree" insignia. Kraft Inc. had challenged the constitutionality of the Florida statute, claiming that it violated the right to freedom of expression.

Kraft had objected to being connected with the state's grapefruit juice advertising campaign because it has no control over the ads' content.