Postmaster General Anthony M. Frank claimed a bittersweet victory yesterday: The U.S. Postal Service will show a less than $1 billion deficit this fiscal year, erasing more than $300 million in anticipated red ink with productivity gains and a cut in the work force.

"I never thought I'd see the day I would be bragging about potentially losing 'only' a billion dollars, but I guess that day has arrived," Frank told a meeting of the Postal Board of Governors.

He quickly cautioned, however, that he may need to ask the Postal Rate Commission for an even larger rate increase than the one under consideration to offset an Office of Management and Budget proposal to take $1.3 billion from the service's budget to help reduce the federal deficit.

The Postal Service has applied for a rate increase that will push the cost of mailing a first-class letter from 25 to 30 cents and has said it needs the money to break even. Postal costs have increased about 19 percent since 1988, and postage is the only significant source of revenue.

Frank's announcement comes at a touchy time for the Postal Service. It is entering into what are expected to be arduous labor negotiations, is under fire from business mailers for the size of its proposed rate increase and has taken much criticism in the last several years for spending hundreds of millions of dollars on automation without any significant productivity gains.

Frank reported yesterday, however, that productivity increased 2.9 percent during the year, more than double what had been anticipated. He credited automation and a reduced work force for the good news.

Through attrition and reorganization, there are 20,000 fewer employees this year in the 750,000- member work force. There were no layoffs.

"What we're really doing is going from a disastrous situation to a decent situation," said Van Seagraves, publisher of the Business Mailers Review. "They're tightening up the place."

The Postal Service moves about 540 million pieces of mail each day.