A labor dispute involving The Newspaper Guild and Arizona's largest daily newspaper has taken a bizarre twist that has one paper suing another in a case that could lead to the forced disclosure of confidential sources.

The legal standoff between Phoenix Newspapers Inc., which publishes the morning Arizona Republic and the evening Phoenix Gazette, and New Times Weekly Inc., publisher of a weekly alternative paper, is being watched with concern by other journalists in the state because of the potential impact the case could have on state laws governing protection of news sources.

Phoenix Newspapers Inc. filed a $50 million libel suit against New Times and the Guild April 1, charging that it was libeled in a Feb. 20 New Times article that quoted unidentified Guild sources as saying the union would file a complaint against the company, accusing it of wiretapping telephones of Guild activists.

A general complaint was filed with the National Labor Relations Board, but the specific eavesdropping charge was later dropped by the Guild after the NLRB found the evidence supporting the charge insufficient, according to NLRB regional director Milo V. Price.

Phoenix Newspapers contends that the wiretapping charge was "false and defamatory" and that New Times editors made no attempt to check the accuracy of the charge with Phoenix Newspapers officials before the article was published. The firm seeks $10 million for each of five claims against the Guild local, New Times, various officials of both groups and several individuals identified only as "John Doe" and "Jane Doe."

The suit also accuses the unidentified individuals of "conspiring to obtain and publish" confidential memos, an apparent reference to a separate September 1979 article in which New Times published excerpts from an internal memo written by an Arizona Republic reporter.

While the suit does not specifically demand the identities of "John and Jane Doe," it appears that successful prosecution of the case would involve revealing the names.

New Times editor Michael Lacey says attempts by Phoenix Newspapers to identify "John Doe" and "Jane Doe" will "jeopardize sources for all reporters in the state."

"Case law will be written around this suit," Lacey contends. "The law in Arizona is not very protective of news sources."

Frank Johnson, managing editor of The Arizona Daily Star in Tucson and a past president of the Arizona Newspapers Association, agrees, saying the lawsuit could have a major impact on the state's so-called "shield law," which protects confidential news sources.

The law, Johnson notes, "has never been tested in a libel suit."

The Republic and Gazette have consistently supported the right of a newspaper to maintain confidential news sources.

But Phoenix Newspapers officials see no contradiction in supporting the concept of confidential sources for its own reporters while suing the rival newspaper over the same issue.

"It's not the same thing," says William Shover, director of community and corporate services for Phoenix Newspapers. "This is a matter of stolen material -- material that was owned by the [Phoenix] newspapers.

"Someone here has been sending confidential memos to the New Times, and that's disloyalty. And honestly, it's treason in a sense, too."

New Times, which began in 1970 as an underground leftist newspaper, has often been at odds with the Republic and Gazette over the newspapers' ultra-conservative political philosophies.

Like underground papers in other communities, New Times consistently criticized news coverage by the Republic and Gazette. On one occasion the weekly devoted an entire issue to spoofing Arizona Republic reporters, columnists and the late publisher, Eugene Pulliam.

Journalists in the state have been amused by the papers' battle, which has lessened in recent years as both the New Time and the Republic have moderated their respective hard-line political philosophies.

But many Arizona journalists are not chuckling at the latest turn of events, which could affect them as well as the principals in the lawsuit.