An administrative law judge for the Justice Department yesterday recommended that Attorney General Edwin Meese III reject an application by the Detroit Free Press and Detroit News for a joint operating arrangement that would allow two of the nation's largest newspaper chains to save millions of dollars over the next century.

Administrative Judge Morton Needelman decided that the two papers had failed to prove that the Free Press would fail unless the government authorized a merger of noneditorial functions allowed under the Newspaper Preservation Act.

Rosslyn-based Gannett Co. Inc., which owns the News, and Knight-Ridder Inc. of Miami, owner of the Free Press, have said the two papers had joint losses of more than $140 million from 1981 to 1987.

In his official recommendation to Meese, Needelman said the two newspapers had incurred such heavy losses not because the Free Press was in a "downward spiral" toward ultimate failure, as the companies had contended, but because of "their strategies of seeking market dominance and future profitability at any cost."

Moreover, Needelman said the executives of the two papers were pursuing those strategies "with the expectation that failure to achieve these goals would result in favorable consideration of a joint operating agreement application."

Knight-Ridder Chairman Alvah H. Chapman Jr. had hinted during hearings on the JOA proposal that the Free Press might be closed if the joint agreement were not approved.

Yesterday, Chapman said the firm was "disappointed" by the judge's recommendation.

"We believe we have a clear and compelling case for the approval and that this is the only way to preserve jobs and to provide for the continuation of two independent editorial voices serving the people of Detroit and the state of Michigan," Chapman said.

Chapman said Knight-Ridder would continue to "vigorously pursue" all steps open to the company and that Knight-Ridder officials still "fully expect our application to be approved by the attorney general."

A spokeswoman for Gannett, Sheila Gibbons, said there would be no comment from the company.

Although the final decision rests with Meese, this is the first time since the law went into effect that both an administrative law judge and the Justice Department's antitrust division have stood solidly against such an agreement.

In a case in Seattle earlier this decade, an administrative law judge recommended approval of a joint agreement between the city's two newspapers, the Justice Department antitrust division urged against it and Attorney General William French Smith ruled in favor of it in 1982.

Under the law, which was designed to preserve metropolitan newspapers that have been rapidly closing in the last few decades, various parties have 45 days to present their final arguments to the attorney general.

A spokesman for Meese said that while the law sets no deadline for a decision by Meese, the attorney general "understands the need for urgency and will proceed to review the record and make a decision expeditiously."

The Detroit agreement, which was opposed by Detroit Mayor Coleman Young, employe unions, some suburban newspapers and others in the area, would result in combined advertising printing and circulation operations. Their editorial staffs and the papers would remain separate. Combined editions would be published on Saturdays and Sundays.

At hearings in Detroit last August, Chapman said that if the JOA is not approved "it would be my recommendation to the Knight-Ridder board that they take steps to close down the Free Press and dispose of its assets."

Needelman said in his recommendation to Meese that in spite of Chapman's statement "the record ... contains no convincing evidence that {Chapman} seriously considered closing the Free Press prior to his witness stand bolt out of the blue, and accordingly, I have assigned little weight to this threat."