A Fairfax County policeman and a businessman were wounded in an exchange of gunfire early yesterday morning after each apparently mistook the other for a would-be burglar, police said.

Donald Wooten, 37, owner of a wholesale stereo-equipment store in Merrifield, was shot after he wounded officer Terry L. Knicely, 27, as Knicely and another policeman investigated what they believed was suspicious activity inside Wooten's store, a police spokesman said.

Both Wooten and Knicely were listed in fair but stable condition at Fairfax Hospital yesterday afternoon with gunshot wounds in their right arms, a hospital spokeswoman said.

According to police, Knicely and officer Chris D. Carley, 22, were patrolling Merrifield at the time in an unmarked car and wearing street clothes as part of a police effort to catch the burglar or burglars responsible for a number of recent break-ins in the area.

Shortly after 3 a.m., police said, the two noticed activity inside Wooten's store, Private Label Marketing Inc., at 2832-A Dorr Ave. As they approached the store on foot, two youths walked out the front door. According to police, the officers promptly "identified themselves as police but the boys ran towards the highway."

At that point, police spokesman Warren Carmichael said yesterday, Wooten, who was inside the store, fired a gun at Knicely through a plate-glass window, wounding him. Carmichael said that Carley fired his gun in return, hitting Wooten.

Unbeknownst to the officers, one of the youths was Wooten's son, and Wooten himself was inside the store with his daughter and a sister, counting cash from a sale the previous evening, according to George Foster, a business associate of Wooten who was answering the store telephone yesterday.

"I was told that they [the policemen] thought there was a robbery going on and they came around with their guns out," said Foster, who was called to the scene shortly afterward to help. "He [Wooten] saw guns out and he had his kids with him and he thought he was going to be robbed. . . . His daughter was sleeping on the couch."

According to Foster, Wooten's wife was not at the store because she had just been called to Fairfax Hospital where her mother had been hospitalized. "She was outside the intensive-care section in the waiting room when her son came by to tell her her husband had been shot," said Foster.

Carmichael said an investigation into the shooting has been started by both the police department's internal affairs and criminal investigations divisions. "Internal affairs will report to the chief of police," he said, "and CID will report to the commonwealth's attorney."

In the meantime, he said, no charges have been placed. In a routine move, he said, Carley has been placed on administrative leave.