The Virginia state pension fund could end up as majority owner of the Potomac Yard switching station in Arlington and Alexandria, widely regarded as one of the East Coast's most valuable pieces of real estate, under a deal proposed yesterday by state officials.

A corporate reshuffling orchestrated by the Virginia Retirement System, which is controlled by close allies of Gov. L. Douglas Wilder, would transform the Richmond-based RF&P Corp. from a rail company with operations dating to the 19th century into a modern real estate firm controlled by state government. The centerpiece of its holdings would be the 320-acre railroad yard south of National Airport and on the Metrorail line.

"RF&P owns some of the best income-producing and developable real estate in Virginia, indeed in the United States," Jacqueline G. Epps, the Wilder-appointed chairman of the retirement system, said in a statement. She added that "VRS has for some time sought to invest a small part of its trust fund in prime real estate . . . . "

The state already owns about 28 percent of what was once known as the Richmond, Fredericksburg & Potomac Co. Under a deal to be worked out with the far-larger CSX Corp., the state would increase its share of the new RF&P to 60 percent or higher, state officials said.

In turn, a 113-mile rail line connecting Richmond and Washington would be transferred from RF&P to CSX Corp., giving that firm absolute control over a critical link between its giant rail networks in the South and Northeast.

Yesterday's proposed agreement is the latest turn in a financial and political drama in which CSX and Wilder -- acting through his influence on the retirement board -- have waged a high-profile battle over the future of RF&P.

A planned merger last winter in which CSX would take over RF&P collapsed after Wilder warned that a marriage of the two Richmond-based firms might be a bad deal for the state. He suggested that the larger firm was making a fast grab for RF&P's real estate assets, which CSX officials denied angrily.

The new deal, which Wilder said in a statement "will clearly be to the benefit of the commonwealth," has the support of the management of the retirement system and CSX, and officials said approval by the boards of directors of these entities is expected. Less certain is the reaction of the RF&P directors, who first learned of the proposed deal yesterday morning and must study it closely, said spokeswoman Susan H. Buffington.

The deal proposed by the retirement system and agreed to by CSX managers would split RF&P into two parts. CSX would merge the railroad into its own operations. RF&P then would exist solely as a real estate developer, with the retirement system owning most of the stock. The deal would work like this:

CSX, which now owns 62.7 percent of RF&P's voting stock and 38 percent of all its stock, would take over all of that firm's rail operations, consisting mostly of the 113-mile line between the two capitals.

CSX would then return about 3.9 million of its shares in RF&P -- which CSX maintains are worth $35 apiece -- to that company in payment for its rail assets, making the effective price about $135 million.

The retirement system would buy the remaining 2.6 million shares of CSX's stock in RF&P for $35 apiece, or about $91 million.

Finally, stockholders of RF&P who did not want to stay with the reconstituted firm could sell their shares back to the new company for $35 a piece.

Epps said the schedule for developing the Potomac Yard parcel, to be carried out by a partnership known as Alexandria 20/20, remains uncertain and is subject to future negotiations with CSX. CSX will continue to run trains across a small portion of the tract.

The proposal does not need approval from the Virginia General Assembly, as last winter's aborted merger would have because of the terms under which the state government originally gave the RF&P stock to the retirement system.

But that deal never made it close to a vote, largely because of Wilder's opposition. Also, many RF&P shareholders complained that the connections between the CSX and RF&P boards prevented them from fairly representing stockholders.

Mark T. Finn, a retirement system director who was instrumental in arranging the proposal, said he believes that RF&P is worth far more than $35 a share, and that this fact drove his interest in the deal.

With at least $100 million in cash and minimal debt, Finn said, RF&P is well-situated to wait until the real estate market is again favorable for development. Development of Potomac Yard, further, could be years away because of zoning and environmental hurdles.

Finn said an ideal timetable would bring the necessary approvals from the three boards of directors by the "first quarter of 1991," although it could easily take longer. After that, he said, the Internal Revenue Service and the Securities and Exchange Commission would have to review the plan.

Staff writer Stan Hinden contributed to this report.