Iran-Contra prosecutors are narrowing the case against Oliver L. North to try to undercut defense arguments that government secrets must be disclosed to guarantee the former White House aide a fair trial.

Responding to President Reagan's refusal to release virtually any of the secret documents North wants to disclose at trial, independent counsel Lawrence E. Walsh conceded that some of the operations financed by the U.S.-Iran arms-sale proceeds were legal.The prosecutor said he wouldn't contest the legality of spending some of the proceeds from the U.S.-Iran arms sales to help drug agents locate American hostages in Lebanon, purchase a Danish ship for clandestine operations, buy radios for a foreign political group and pay Nicaraguan rebel leaders.

"The government is willing to concede, for the purposes of this case, that this group of expenditures went to programs otherwise lawful" but not authorized as part of Reagan's attempt to free hostages by selling arms to Iran, Walsh said in a pleading released late Tuesday in federal court.

Walsh, however, maintained that there was still sufficient evidence to prove that North conspired with former national security adviser John M. Poindexter and arms dealers Richard V. Secord and Albert Hakim to defraud the government.

The central conspiracy and theft-of-government property charges against the former National Security Council aide and his co-defendants, who are to be tried separately, stems from the diversion of more than $14 million in arms-sale profits to the Nicaraguan rebels, known as the Contras.

North's "deceitful acquisition" of $18 million in profits from the U.S.-Iran arms sales is "the critical element of North's behavior that makes it criminal," Walsh said.

Instead of turning over the money to the U.S. government, North placed it in secret Swiss bank accounts along with funds raised from foreign countries and from private donors through a tax-exempt foundation.

"Whether he used the diverted funds for ends that the government could otherwise legitimately fund is irrelevant," the independent prosecutor said. "North's crime lies in how he acquired and maintained control of these funds, not in the specific purposes for which he spent them."

By conceding that some covert operations directed by North were legal, particularly the Drug Enforcement Administration's efforts to free American hostages in Lebanon, Walsh apparently hopes to foreclose defense use of classified documents.

The Reagan administration is particularly unwilling to divulge any information that might compromise efforts to release the hostages. Disclosure of such material could jeopardize the lives of the hostages or subject them and others to torture, Walsh warned earlier this year.

The pleadings were filed at the request of U.S. District Judge Gerhard A. Gesell, who is conducting secret hearings on North's objections to deleting classified material from 395 documents Walsh wants to use as trial exhibits.