A labor union representing bus drivers, subway operators and other Metro employes has broken off contract negotiations with the transit authority and called for arbitration of disputes over wages and other issues, according to union and Metro officials.

The move marked a setback for Metro, which launched an effort more than a year ago to reduce friction with its unions and put an end to years of strained labor relations.

Metro and union officials had hoped the contract could be negotiated without outside arbitration.

However, Local 689 of the Amalgamated Transit Union, which represents about 5,600 blue-collar Metro employes, declared an impasse Thursday night after five months of negotiations and invoked its right to submit the dispute to a three-member arbitration panel.

Tom Roth, president of the Labor Bureau Inc. and one of the union's principal negotiators, said the union halted the talks after receiving a "final offer" from Metro officials. "It wasn't enough," Roth said. "We're just too far apart."

"Everybody moderated their positions, but we didn't come far enough," said George F. Babic, Metro's labor relations director.

Despite the breakdown in negotiations, no strike has been threatened. Metro and union officials said they will seek to maintain relatively harmonious relations on day-to-day issues, and officials raised the possibility that contract talks may resume before arbitration proceedings get under way. Arbitration is expected to take months. The latest three-year contract expired April 30, but its terms remain in effect.

Although strikes by Metro employes are prohibited, wildcat protests have occurred, including a seven-day walkout in 1978.

As part of its efforts to improve labor relations, Metro reorganized its labor relations office in 1984 and key disputes were later settled.

In 1983, a contract with Local 689 was concluded without arbitration for the first time in nine years.

For Metro, labor contracts represent a major financial issue. Local 689 is the largest union at the authority, which incurs deficits of more than $200 million a year. More than half of Metro's operating costs go to pay for labor.

At the outset of the recent negotiations, the union had sought pay raises of 7 percent a year along with improvements in other benefits. The authority had taken a hold-the-line stand designed to limit wage increases to rises in inflation.

Negotiators were described recently as only one or two percentage points apart on economic issues. Metro officials also pressed for cost-cutting changes in work rules.