August 27, 1986

''There are mass graves because we only had a few laborers and we could not dig individual graves.

The Transportation Department today rejected the proposed acquisition of Eastern Air Lines Inc. by the Texas Air Corporation, saying the plan would reduce competition on the shuttle routes serving New York, Boston and Washington. Eastern and Texas Air responded quickly by expressing confidence that the merger could be completed under revised terms. Until indications in the past few days of governmental misgivings, analysts had expected approval of the merger, which would create the nation's largest airline company, with annual revenues of $6.7 billion, slightly larger than United Air Lines Inc. Eastern is the nation's third-largest airline and Texas Air is No. 7. Analysts Remain Optimistic In July, the Justice Department said it expected to support the $676 million purchase. Today analysts remained optimistic that the merger would take place. Candace Browning, an airline analyst with Oppenheimer & Company, said: ''Texas Air still very much does want to own Eastern. The most likely scenario is that the deal goes through.''

People Express Inc. is expected to file for bankruptcy protection today for its Frontier Airlines subsidiary because attempts to find a buyer for the airline were unsuccessful, a source close to the negotiations said last night. ''Most likely there will be a filing Wednesday,'' the source said. Although one airline remained interested in buying some of Frontier's assets, the source said, such a sale would be difficult to work out. And even if such a sale were made, Frontier would probably still have to file for bankruptcy protection, the source said, who added that another possibility , albeit unlikely, was that United Airlines would change its position and agree to buy all of Frontier.

Companies The merger of Texas Air and Eastern was blocked by the Department of Transportation, which said the deal would reduce competition on routes between New York and Boston and Washington. It was the Government's fourth rejection of a major corporate merger in recent weeks. Eastern and New York Air, which is owned by Texas Air, currently operate shuttle service. Pan Am plans to add competing shuttles, but the Government said its planned service would not provide adequate competition. Texas Air said it would try to alter the deal to win approval. [ Page A1. ] Maintenance problems and flight cancellations at Eastern, combined with widespread fare wars, have added to its woes, airline analysts said. [ D3. ] Frontier Airlines is likely to file for bankruptcy today, according to a source close to the negotiations between its parent, People Express and several possible buyers. [ D1. ]

A day after White House officials in Santa Barbara indicated that Libya was planning new acts of terrorism, Administration officials here expressed concern that speculation about such activity had got out of hand. They expressed particular worry that such speculation might seriously undercut new American diplomatic efforts to toughen economic and political sanctions against Col. Muammar el-Qaddafi's Government. The officials who spoke today said the United States had no hard evidence that Libya was planning new terrorist attacks, and they flatly denied reports of impending American military action against Libya. Talks With Europeans Vernon A. Walters, the United States delegate to the United Nations, is expected to travel to Europe next week to explore widening these sanctions, and Administration officials are worried that he may be asked to produce evidence about new Libyan terrorism, which the United States does not possess.