The Federal Trade Commission said yesterday it will block the proposed merger of Staples Inc. and Office Depot Inc., two of the nation's largest office supply dealers. The retailers in turn vowed to fight the FTC in court, setting the stage for a rare legal showdown over U.S. antitrust laws.

The FTC's decision follows weeks of negotiations between regulators and the retailers, with company executives insisting in closed-door meetings and in an advertising campaign that combining two of the top three office products retailers would lead to lower prices for consumers. But FTC officials said their study of prices in a sampling of U.S. cities did not support that argument.

"What their pricing data told us is that in markets where Office Depot and Staples {compete} head-to-head, prices are 5 to 10 to 15 percent lower than in markets where only one of those superstore chains {is}," said William J. Baer, director of the FTC's Bureau of Competition. "What these guys want to do is stop the bloodletting, stop the pressure that's on them to keep cutting prices, because that means cutting into . . . profits."

The FTC chose to halt a merger that regulators felt could have ill effects on consumers, and which consumer groups opposed. Antitrust experts said the FTC's action implies that other retailers could have trouble getting federal approval to combine forces in the future.

The agency has been toughening its stance in recent years on mergers of companies that deal directly with consumers. After allowing numerous department store mergers in the 1980s, for example, the FTC last year scuttled a proposed combination of two drugstore chains -- Rite Aid Corp. and Revco D.S. Inc. -- by stipulating that they would have to sell about 700 of their stores to win approval.

"It's a more aggressive stance -- it's reflective of a change that has occurred over the last four years or so," said Charles F. Rule, an antitrust lawyer in Washington who in the 1980s headed the antitrust division at the Department of Justice.

"When I was running the Department of Justice antitrust division, I doubt seriously that we would've brought this case," he said. "It'll be interesting to see whether or not they can sustain the challenge in court. I'm a little dubious."

Baer of the FTC said the agency's decision does not represent a shift in its thinking about competition. Rather, he said, the agency evaluates each case on its merits and regulators concluded this merger would clearly reduce competition in its industry.

"This deal is going to deny consumers the future benefits that competition has brought them thus far, and that's what antitrust laws are all about," he said. "It really comes down to where there is credible evidence that . . . if there were only one firm, they'd have the ability to raise prices. That's the situation here."

The Washington area, with 37 Staples and Office Depot locations, is one of the regions that would have only one office products chain if the merger succeeded, because OfficeMax, the other office superstore chain, does not operate here.

The ruling surprised some antitrust lawyers because it suggests that the FTC is taking a narrow view of Staples' and Office Depot's niche -- the retail superstore. The agency determined that other businesses selling office products, such as discount stores, mail-order firms and warehouse clubs, are not effective competitors to "category killers" such as Staples.

Given this apparent change in attitude by regulators, executives who structured the Staples-Office Depot merger were dumbfounded by the FTC's decision, which puts them in an uncharacteristic position. With their huge networks of stores, enormous buying power and efficient distribution systems, Staples and Office Depot have spent the past decade rewriting the rules of office products retailing and in the process lowered prices dramatically, while pushing thousands of independent office supplies dealers out of business. The combined company would have $10 billion in annual sales.

But now, the chairmen of these two companies, which consider themselves consumer-friendly, find themselves cast as the enemy of American shoppers by government regulators.

"Frankly, we are just extremely, extremely disappointed that the federal government would elect to sue two of the very best friends the American consumer -- and particularly the small-business consumer -- has," Thomas G. Stemberg, chairman of Massachusetts-based Staples, said in an interview yesterday.

Stemberg said that over the weekend, in a last-ditch effort to save the deal, he offered to sign a consent decree assuring the FTC that the combined chain would lower prices. But now, he said, he will prove it in court.

"The federal government, in the form of the FTC, stands between our customers and lower prices, and we've got an obligation to our customers to fight this as long and as hard as we can, and we will," Stemberg said.

The FTC said it will file suit in federal court later this week to seek a temporary restraining order to stop the deal and then, at a hearing in a couple of months, plans to request a permanent injunction.

"Whoever wins that . . . that typically ends it," Stemberg said. "For these next two months, we're fighting it tooth and nail."

If the FTC adopts a similarly tough stance in other antitrust cases, it could be disruptive to the retail industry, which many experts say is about to undergo another major contraction -- this time among superstores that prompted the consolidation of more department stores and other retailers in the 1980s. Now, though, it's unclear whether such deals could win the government's blessing.

"My experience is that the FTC is often of the view that retailing is a relatively easy business to get into and out of, and that it's therefore a business that is relatively difficult to create or expand market power in," said Sandy Pfunder, an antitrust lawyer in Washington. "What I assume is happening here is that the FTC is in effect saying superstores are a different kind of retailing."

Sources close to the deal said the FTC would have approved the merger if Staples and Office Depot had sold 62 stores nationwide out of a combined total of 1,100 outlets. But the agency restricted potential buyers, for example ruling out consumer electronics retailer Best Buy Inc., computer retailer CompUSA and non-retail financial investors. That meant the only potential buyer was OfficeMax, the largest office supply retailer, and it could not strike a deal with Staples, sources said.

Staples stock closed at $23.25 yesterday, down $1.31 1/4, on the Nasdaq Stock Market. Office Depot shares fell $5.50, to $17.12 1/2, on the New York Stock Exchange. CAPTION:COMPANIES IN PROFILE Staples * Headquarters: Westboro, Mass. * Operations: Primarily in the Northeast, also in California * 1996 revenue: $3.97 billion * 1996 earnings: $106.4 million * Yesterday's closing stock price: $23.25, down $1.31 1/4 Office Depot * Headquarters: Delray Beach, Fla. * Operations: Primarily in California, Florida, Texas * 1996 revenue: $6.07 billion * 1996 earnings: $129 million * Yesterday's closing stock price: $17.12 1/2, down $5.50 CAPTION: This Office Depot in downtown Washington is one of 37 stores the would-be merger partners operate in the D.C. area.