Virginia Gov. Gerald L. Baliles, saying that election spending in state and local races has "taken on the character of an arms race," said yesterday that he will propose legislation in January to limit spending and to identify all sources of campaign contributions.

In a post-election news conference in Richmond, Baliles also pledged to implement plans immediately for a state lottery, which was endorsed -- over his personal opposition -- by state voters Tuesday.

Baliles' Democratic Party maintained its stranglehold on the General Assembly in Tuesday's elections, hanging on to 64 of 100 seats in the House of Delegates and at least 30 of 40 seats in the Senate. However, more than half of the assembly seats went uncontested.

Baliles attributed the lack of competition to "the cost of running." Spending in one highly publicized Senate race in the Richmond suburbs topped $1 million, and post-election financial reports, due to be filed next week, are expected to reveal record cumulative spending for legislative and county board seats.

While Democrats may have benefited this year, Baliles said, "over a period of time . . . it is not good for democracy. For the system to work, there must be a choice in the ballot booth."

Both parties "can raise money, and a lot of it," Baliles said. "Heavy spending breeds heavy spending, as one party fights to build an edge on the other.

"I freely concede that I have contributed as much as the next person to the present predicament. As a party leader, I do not want to see our candidates overwhelmed by heavy spending on the other side. However, I think it is time for a treaty, of sorts."

Baliles said he had discussed the matter with legislative leaders, and while they reached no conclusions about specific legislation, they agreed that 1988 "looks like the first, best opportunity to restore some common sense to the financing . . . of future legislative elections."

Virginia takes pride in its part-time legislature, but Baliles said "the citizen legislature cannot be preserved if it costs a large fortune to run for office."

Even before the final two weeks, the spending record for a legislative seat, about $255,000, had been quadrupled in suburban Richmond, where Republican Eddy Dalton, widow of former governor John N. Dalton, ousted veteran Democrat Sen. William F. Parkerson Jr.

In addition to seeking some kind of limit on spending, Baliles said he wants to "ensure that we know the sources of all contributions" to candidates.

He first brought up that idea last week in Fairfax County, after Democrats complained that state and county Republican parties had "laundered" about $150,000 in contributions from developers to GOP board candidates.

Republicans responded that state election laws, which do not require political parties to identify the sources of their contributions, and set no limit on spending, were enacted and perpetuated by the majority Democratic Party.

Leaders of both parties reacted cautiously to Baliles' proposals.

Virginia Republican Chairman Donald W. Huffman and Democratic Chairman Lawrence E. Framme III said they could support legislation that required political parties to disclose contributions earmarked for specific candidates, but both opposed complete financial disclosure by parties. Huffman said he also opposed limits on individual contributions, while Framme said he had an "open mind" on the subject.

"I proceed from the assumption that what the business people do across the board is private unless there is a significant policy reason for them to disclose it," Framme said. "But we've never looked at {spending limits} in the context of million-dollar elections before. It's scary."

Said Huffman: "I think any person ought to be able to give as much of his money to whomever he wants to, because it's his money. Putting caps on spending would just be an incumbent-protection bill. If you take the power to outspend an incumbent away from a challenger, the incumbent is there from now on."

Baliles said Tuesday's election results prove the axiom enunciated by former U.S. House speaker Thomas P. (Tip) O'Neill Jr. that "all politics is local."

"No one issue seemed to dominate," Baliles said. "Individual races marched to their own drummers." The governor said that while Republicans "predicted they would gain five seats in the Senate alone, and that didn't happen," he was "particularly saddened" by the defeat of Senate President Pro Tem Parkerson, the chamber's senior member.

The Dalton-Parkerson contest was the most closely watched in the state, not only because of its expense but because both the Democratic and Republican organizations staked considerable prestige on it. "We went eyeball to eyeball with the {Baliles} administration, and we beat 'em," Huffman said. "They threw everything they had into that race."

Even though Dalton has never held public office, her link to her late husband has given her enormous visibility, and Huffman was already touting her yesterday as a potential candidate for statewide office. Framme called such predictions "wishful thinking."

Overall, Republicans had hoped to pick up at least three seats in each house, but they fell short of their goal. Democrats had a net loss of one seat in the House, although recounts were possible in two races. And depending on the outcome of a race in Southwest Virginia that was still in doubt yesterday, the GOP either broke even or lost one seat in the Senate.

In promising to move quickly on setting up a lottery, Baliles cautioned that it would be a couple of years before any gambling proceeds -- estimated at $200 million a year by lottery supporters -- would be available.

"Virginia faces a host of pressing concerns, from education to international trade, from mental health to child care and law enforcement, and the lottery will not relieve us of the responsibility to address these matters and make tough decisions on the allocation of resources," the governor said.

As the result of Tuesday's vote, in which a lottery was backed by 57 percent of the voters, legislation enacted this year by the General Assembly automatically takes effect Dec. 1. The governor said he would appoint a five-member commission and a director within 60 days, but it is expected to take several months for them to organize the first game, which is expected to be an instant lottery in which numbers are rubbed off tickets and payoffs are made on the spot.

The more popular, and lucrative, numbers game requires installation of computers, and will take longer to set up.

Unlike games in Maryland and the District, Virginia's lottery law will prohibit advertising that would entice people to gamble. But Del. J.W. (Billy) O'Brien, the Virginia Beach Democrat who sponsored the legislation, said Tuesday night that he might try to get the 1988 legislature to remove that restriction.