The D.C. City Council stepped into a prolonged dispute over a proposed pay increase for city police officers yesterday, granting itself emergency authority to act on the increase if Mayor Marion Barry fails to asks the council to vote on the measure within 10 days.

An arbitration panel ruled earlier this year that the city's 3,400 police officers should receive a 15 percent increase in salary over three years, which would cost the city $23 million more in pay and benefits than Barry's administration offered. Instead of sending the recommendation to the council for final action, Barry has sought to have it overturned by the courts and the D.C. Public Employee Relations Board.

Council members contend that the officers are entitled to the pay increase, which for the first time would give them more than was granted to city firefighters, and are seeking to force the mayor's hand.

In other action, the council adopted emergency legislation to pave the way for a merger of NS&T Bankshares Inc. and United Virginia Bankshares Inc. and gave final approval to legislation designed to revamp the city's procurement system.

Under the police contract emergency legislation, unanimously approved by the council, Barry would have 10 days from the time the measure takes effect to send the contract to the council for final approval.

City Council Chairman David A. Clarke said he would not be surprised if Barry vetoes the legislation.

The Fraternal Order of Police, which represents city police officers, has accused Barry of using the courts to delay action on the pay raise and sought passage of the emergency legislation. Clarke said the council's action should give police officers "greater assurance" that the pay raise will get a fair consideration when it comes before the council.

The arbitration panel's ruling would give police officers, whose annual salaries range from $19,000 to $31,000, a 4 1/2 percent increase retroactive to October 1984, a 5 percent increase this year and a 5 1/2 percent increase for 1986.

In approving the banking legislation, the council formally recommended that the Federal Reserve Board approve the acquisition of NS&T Bankshares Inc. by United Virgnia Bankshares, Inc. The measure also eliminates a requirement that the merger application be sent to the council 30 days before it is submitted to the Federal Reserve Board.

Officials for NS&T and United Virgnia have said that the emergency legislation is necessary for the bank holding companies to avoid federal tax law changes that, if adopted, would cost United Virgnia $4 million in earnings in 1986 if the merger is not completed this year.

The proposed tax change, part of President Reagan's tax proposal pending before Congress, would eliminate a deduction that banks may take for interest paid to depositiors whose money is used to acquire tax-exempt municipal and industrial development revenue bonds. The tax change would apply to aquisitions of banks that hold such bonds. NS&T holds $115 million in tax exempt bonds, according to United Virginia officials.

The NS&T and United Virginia merger would be the first to take place since the council adopted interstate banking legislation authorizing banks in the District and 12 southeastern states to acquire each other. While the council maintains that the merger will produce major financial benefits to the city, the D.C. Reinvestment Alliance, a newly formed nonprofit coalition of community-based organizations, has filed a protest with the Federal Reserve Board.

The alliance alleges that NS&T has an inadequate record of meeting the needs of minorities and low- and moderate-income residents. The protest accuses NS&T of contributing to a "pattern of disinvestment from minority and low-income areas" and of giving "false and misleading" information regarding its Community Reinvestment Act Statement.

Larry F. Weston, a spokesman for the alliance, said his group will withdraw its protest only if the bank officials "deal substantially with the issues we have raised."

Samuel Cardwell, vice chairman of United Virginia, said he has met with 12 representatives from the alliance and that he is confident some agreement can be reached. United Virginia Bankshares officials submitted to the council a proposed $5 million community development investment commitment to be used for "worthwhile" projects within three years after its planned merger.

City Council member Charlene Drew Jarvis (D-Ward 4), chairman of the council's Committee on Housing and Economic Development, stressed that the proposed merger would be beneficial to the city. She noted that the base of operation would be in the city and that the loan line for a single project would increase from the $10 million now offered by NS&T to $60 million after the merger.

The procurement bill given final passage is aimed at improving the city's contracting practices by eliminating waste and cutting down on abuses of competitive bidding rules. The bill calls for the Department of Administrative Services to review all purchases made by various city agencies and reduces the number of agencies allowed to make purchases of up to $10,000 a day with a single vendor.