Gannett Co., the Arlington-based media company, is expected to name Gary L. Watson as president of its newspaper group, which operates the largest chain of papers in the country and is Gannett's most profitable unit.

Gannett plans to consolidate the division, which is currently split into two parts, and place the combined operation under Watson, a 21-year Gannett veteran, beginning in October. For the past 4 1/2 years, Watson has been president of Gannett's Community Newspaper Division, consisting of the 60 smaller daily newspapers in Gannett's 81-paper chain.

Watson's appointment, which has not been announced publicly, sparked rumors inside and outside the company yesterday that he is being groomed to become Gannett's president and chief operating officer. If so, Watson would become the company's second-ranking executive behind John J. Curley, who currently serves as chairman, president and chief executive.

In an interview yesterday, Watson dismissed talk of future promotions as "speculation" and would not comment about it further.

Brian J. Donnelly, currently president of Gannett's metropolitan newspaper group, will become executive vice president of the newly consolidated division, reporting to Watson. In his new job, Watson will oversee all of Gannett's daily papers, with the exception of USA Today, whose president is Tom Curley, the brother of John.

Watson, 45, said the consolidation of the two newspaper divisions was in part a response to the increasingly tough environment for newspaper advertising. A downturn in advertising, especially from retailers, has reduced profits for a number of newspaper companies in the past year.

Gannett itself failed to sustain its 22-year string of quarterly earnings increases during 1990's second quarter. The company said last month that its newspaper revenue fell 2 percent in the second quarter compared with the same period a year ago and is down 1 percent for the first six months of the year.

Gannett's newspapers accounted for 82 percent of its $1.7 billion in sales during the first half of this year, and 91 percent of its $330.5 million in operating profit.

Watson said Gannett would increase its efforts to attract small advertisers, especially because many large department stores are troubled. He said the company's papers are increasing the number and frequency of their daily "zoned" editions, which include advertising and editorial matter targeted to a small segment of a community. The company is also experimenting with publishing telephone directories in some markets to protect its share of local advertising.

PaineWebber Inc. analyst Ken Noble, who follows Gannett, said it was likely Watson was in line for the company's No. 2 job. Noble said he believed the executives ahead of Watson on Gannett's current organization chart -- including chief financial officer Douglas H. McCorkindale and USA Today Publisher Cathleen P. Black -- would remain in those positions.

Like John Curley, Watson has advanced through the ranks of Gannett on both the publishing and editorial sides. He was a reporter and editor for Gannett papers in Rockford (Ill.), Boise, Idaho, and Springfield, Mo. In 1984, he was named president of Gannett's Midwestern newspaper division and of the Cincinnati Enquirer before being promoted to president of the community newspaper division in 1985.