A cease-fire was declared in one of the nation's most ferocious newspaper wars yesterday when The Detroit News and the Detroit Free Press announced plans to end the flow of red ink by combining their business operations.

Under the proposed joint operating agreement, Knight-Ridder Newspapers Inc.'s Free Press would continue to publish in the morning and Rosslyn-based Gannett Co. Inc.'s Detroit News would remain the afternoon paper, five days a week. The separate staffs would combine to produce one edition on Saturday and one on Sunday.

A limited morning edition of The News would be eliminated.

"The Iran-Iraq war has finally come to some kind of resolution," said News editor Lionel Linder.

Editorial and news staffs of the two papers would remain separate while advertising, production and circulation operations would be combined. The papers would be published by the Detroit Newspaper Agency, which will be under the joint ownership of Gannett and Knight-Ridder, with Gannett in operational control.

The arrangement must be approved by the U.S. attorney general, who may permit such deals if one newspaper is in danger of failing. That government review process is expected to take about two years.

Gannett said the editorial battle between the liberal Free Press and more conservative News would continue daily and on weekends, when the single paper would have two separate editorial and op-ed pages, one for each newspaper.

Linder said that, with Detroit's stagnant economy, "The city could no longer support two newspapers."

He added that he hopes the competition will continue to be vigorous, even though it will be different from the cutthroat newspaper war that has been waged until now.

"It will be a little bit like changing from tennis to golf," Linder said.

"We're so used to being in the most intense newspaper situation in America, it is obviously rather a shock for folks to suddenly say that the rules are being changed," said David Lawrence Jr., executive editor of the Free Press. "I have come at least to . . . intellectual . . . peace with the sense that what this does is to preserve two healthy newspapers for the next century."

There are 21 cities across the country with joint operating agreements, which can be lucrative for publishers because less competition usually means that advertising rates can be raised. Although Gannett and Knight-Ridder would profit from this change, some Detroit advertisers said they are afraid that ad rates will go up.

"I think the next step will be higher costs to advertisers, who will pass them along to consumers," said Detroit advertising executive John Kolon. "I think ad rates will go up, and consumers will bear the costs.

"Detroit was one of the last cities to have two fiercely competitive newspapers. Now if there is only one game in town, there will only be one price, and that will be higher."

Knight-Ridder, which acquired the Free Press in 1940, will argue that its newspaper is failing financially and could be preserved only through a joint operating agreement. The Free Press has lost $35 million from operations over the last five years, while The News, which was acquired recently by Gannett, has lost more than $20 million in the same period.

"We believe that only this jointly owned agency . . . can ensure that both The News and the Free Press will survive long term," Gannett Chairman Allen H. Neuharth and Knight-Ridder Chairman Alvah H. Chapman Jr., said in a statement. "Survival of both newspapers is vitally important to readers, advertisers, employes and the public in general."

In an interview, Neuharth said he expects the government approval process to be "straightforward." He predicted that the combination of the two newspapers on weekends would lead to "rates as favorable as what they have now" for advertisers who have been buying space in both papers.

Neuharth said casual discussions between Gannett and Knight-Ridder began last fall, with a final agreement reached Friday. He said Gannett believed that its recent acquisition of The News was a good deal by itself and that, if a "joint operating agreement should come about, it would be a bonus."

The papers have been in a daily circulation duel, with The News at 645,016 and the Free Press at 634,466. The News has an 80,000 circulation lead on Sunday with 837,821 and also pulls in about 60 percent of the advertising revenue.

As a result of its circulation and advertising leads, Gannett would control the management of the joint operation, and would take 55 percent of the profits during the first five years. During the next 95 years, Gannett and Knight-Ridder would split the profits evenly.

Gannett's Detroit News also would have an editorial advantage on Sundays, because its staff would produce the news sections of the paper, while the Free Press staff would produce the features. On Saturdays, a less significant day for the papers, the Free Press would produce the news sections and The News would do the features.

Among many reporters for both newspapers, the announcement was both surprising and unsettling. At The News, reporters were concerned that they no longer would be putting out a morning newspaper.

Before approving a joint operating agreement, the attorney general must determine that at least one of the newspapers is in "probable danger of financial failure," regardless of the financial strength of its parent company.

In other words, the wealth of either Gannett or Knight-Ridder would not bar a joint operative agreement between the two companies if one of their Detroit newspapers met the "probable danger" test.

In a recent major case, the Justice Department's antitrust division opposed a joint agreement for the two leading Seattle newspapers but failed to persuade an administrative law judge and Attorney General William French Smith, who approved the agreement in 1982.

The antitrust division had argued unsuccessfully that a close analysis should be made of the financial relationship between the "failing" newspaper and its parent company to clarify whether closing the newspaper would help or hurt the parent.

Such a close analysis is justified, said Alan Marx, the former chief of general litigation for the antitrust division and now in private legal practice. The Newspaper Preservation Act "wasn't intended to be a free ride through the Sherman [Antitrust] Act," he said.

A department spokesman declined to comment yesterday on whether the antitrust division would raise the same issue in the Detroit case.