Negotiations have been called off and both sides in New York's newspaper strike are settling down to what could become a very long strike.

As the strike entered its third week, federal mediator Kenneth Moffett said yesterday, "The situation is very dismal." He said he would call the two sides together again at the first glimmer of change in position either by the three publishers or the pressmen's union.

In the absence of the newspapers, hotliners, alternative papers, sandwich boards, leaflets and even a squad of women in Dolly Parton look-alike wigs advertising a concert by the country music queen have attempted to catch the attention and dollars of New Yorkers.

New Yor City officials estimate that business loses about $2 million daily without newspapers to carry advertisments and Wall Street analysts believe the three papers are losing about the same amount each day they remain closed.

Publishers of The New York Times, Daily News and Post, however, provide no figures and it is generally acknowledged that August always is a lean month for newspapers - the best month to be closed down.

The strike was predictable, given the publishers' move to unilaterally change work procedures in their carefully calculate how long a strike they could stand and still come out ahead if they gain their objective of reducing the pressroom workforce which by their reckoning, is one-third to one-half larger than needed.

However, Jonathan Thompson, a spokesman for the Daily News, said he personally was surprised not that a strike began, but that no serious negotiations had begun after the pressmen walked off their jobs.

Times spokesman Leonard Harris said the publishers only posted unilateral work changes after the union's willingness to consider manning reductions "seemed to dwindle down to nothingness."

The leader of the 1,550-member Printing Pressmen's Local No. 2, William Kennedy, has been talking as tough as his adversaries. He says his men can and will wait as long as it takes to get what they want.

History, however, is against him. In city after city around the country, Kennedy's parent union has agreed to pressroom reductions beyond those being asked by New York's publishers. New York, always a strong union city, is one of the last places the battle is being fought.

Pressure on both sides will increase after Labor Day. As the school season starts, the publishers will be losing better advertising weeks than the August vacation period and the pressmen's brother union s will be suffering.

The Newspaper and Mail Delivers Union has no international and no strike benefits. These drivers hold the key to the strike. If they reversed their position and crossed the pressmen's picket lines to deliver, the publishers have said they would be able to use new, automated devices to print the papers without unions.

However, Douglas LaChance, the driver's union leader, told his men to cross a newspaper guild pocket line in June and his membership revolted, stopping publication and bringing the dispute to a quick end.

None of the unions supporting the strike wants to cross a picket line, but Kennedy has already been told privately by his fellow unionists not to be intransigent.

New York is one of two states (Rhode Island is the other) that pay unemployment compensation to striking workers. Pressmen and others out of work because of the strike can apply for benefits after seven weeks and begin collecting them for the ninth week of the strike, a Labor Department spokesman said.

As the strike has entered its third week it has been complicated by some of the other unions calling strikes of their own - largely in order to qualify for strike benefits under their regulations. The 350-member electricians' union has called a strike and the equally small machinists' union will begin picketing today, it announced yesterday. The guild has struck only the Post.

Post publisher Rupert Murdoch is put in a curious position by the strike. He is spared the regular losses the Post has been running while his two other publications here, New York magazine and the Village Voice, are fat with advertising and selling fast.

Murdoch's involvement with one of the newborn tabloids that has appeared since the strike, the Daily Metro, touched off a series of rumors that he planned to let the Post die during the strike and ride a unionless Daily Metro to greater financial health.

Murdoch promised to buy 150,000 copies a day of the Daily Metro and advanced its publisher, Fred Iseman, the money for "a few days" of purchases. Post executives helped Metro sell advertisements and set up operations.

Murdoch, however, denied that he has any involvement with the Metro beyond using it to deliver to 150,000 regular Post subscribers in Queens who would otherwise be without a paper and might fall prey to blandishments from the Long Island paper Newsday, which has been fighting Murdoch tooth and nail over that region, served by Long Island Press until that paper folded last year.

Murdoch was not alone in assistine a strike paper to get started. The New York Times quietly backed the first entry, the City News, by introducting it to Times news deliverers and agreeing to do a small amount of its billing. Times executives acknowledged their role only grudgingly after reporters interviewed deliverers.

Times subscribers found the City News on their doorsteps in the morning and most have accepted the substitute, a sampling of deliverers indicated.

The Times and its deliverers hope people don't lose what Irving Wexton of Park East Newspaper Delivery called "the home delivery habit." They also wouldn't want subscribers to learn to enjoy another paper that will continue after the strike - like Newsday, the Record in Bergen County, New Jersey, or the Ganneti chain's paper in Westchester.

The City News, Daily Metro and their weaker rival, the New York Daily Press, all say they plan to fold when the regular papers return.