The Alexandria city council learned yesterday that the proposed merger between the designated redeveloper of the decaying Torpedo Plant complex along the Potomac waterfront and another firm, once considered its bitter rival, has collapsed.

At the same time Mayor Charles E. Beatley Jr. said that he wanted to see the redevelopment of the 6.25 acre complex proceed in one massive step, rather than in two stages, as had been urged by the previous council, headed by then-mayor Frank E. Mann.

The failure of the proposed merger "in no way" prevented the designated developer - the Alexandria Waterfront Restoration Co. - from beginning work, according to Charles R. Hooff III, head of the group.

"We disagreed over who would be in the driver's seat, and who would be in the deadman's seat." Hooff told the council during the final day of its weekend think tank style retreat,.

The Hooff group and its one-time competitor, the Redstone Development Corp., had announced last May their intention to merge if either one was chosen to transform the hulking gray torpedo plant buildings into a lively urban complex. The merger proposal was made only hours before the council voted on May 8 to give the contract to Hooff.

The proposed merger called for Redstone ro provide 75 percent of the needed development funds. Hoof said yesterday he was returning to his original funding source, a Manhattan bank, for money.

Councilman Donald C. Casey urged the council to reconsider its award of the project, a remark that sent visible shudders through the staff of City Manager Douglas Harman. The project has been one of the staff's most difficult and time-comsuming efforts.

However, city attorney Cyril D. Calley restated an earlier legal opinion that the merger intent between Hooff and the Redstone group was strictly a private matter between two private companies, and did not involve the city at all.

"Your award was made to the Waterfront Restoration group," and should be reconsidered only if the council decided some fraud or deceit had been involved, Calley said.

No one claimed that deceit or fraud was a factor in this case. Hooff has stated that the merger between two of the three competing firms was proposed to increase the chances that each would share in the rewards of the potentially lucrative project.

Last May, the council voiced approval only for Hooff's designs for the massive doughnut-shaped building on Lee Street to be turned into 99 condominiums. It withheld approval of his plans for other parts of the complex, which would house stores and offices.

Yesterday Beatley said he wanted Hooff to work on both aspects of the project at the same time, to avoid possible citizen opposition to the commercial parts of the project after the condominiums had been completed. Hooff agreed.

The only remaining action needed before work can begin is agreement by the council to sell to Hooff land that one of the buildings is on. That would require at least a six-to-one vote. No opposition to the sale was voiced yesterday.

The vote is expected to take place this fall.