AT 10 o'clock last Tuesday night, air raid sirens newly installed in the center of the Argentine capital began to scream, street lights throughout vast sections of the city were turned off and more than 2 million of the city's 8 million residents were ordered to draw their blinds and make sure that no light escaped through their windows.

The neon signs that make this city a festival of color at night were shut off. Vehicles crawled along the streets, their headlights taped over except for small slits-just big enough to allow drivers to see pedestrians, who were required to wear light-colored clothing or to carry newspapers so they could be seen.

For more than an hour, Bluenos Aires, a city that works by day but lives by night, was blacked out as part of a practice air raid drill-in case the Chilean Air Force decides to bomb Argentina's capital city later this week.

Most people here thought the Argentine military government's decision to hold the blackout was a bit silly, though, because according to informed diplomatic sources the Chilean Air Force has no planes capable of bombing Buenos Aires.

Last Tuesday's air raid drill was the most dramatic in a series of steps by the Argentine government in recent months to prepare the populations of 25 million for war-and to warn the 10 million Chileans, also ruled by the military, that the government here is serious about negotiations now under way over the future of three little islands in the Beagle Channel, just south of Tierra del Fuego, at the tip of South America.

Actually, Argentina is far more concerned about sea and undersea rights that Chile has claimed as a result of an international arbitration that awarded the disputed island to Chile last year and about Argentina's claims to vast portions of Antarctica, which could be affected if Chile has control of the islands. The area is thought to contain oil deposits.

By agreement of both the Argentine and Chilean governments, the latest negotiations, which began last April, are to end Thursday. Of course, even if the talks fail, war would not necessarily begin.

Nonetheless, the situation is sufficiently confused-and the passions in Argentina sufficiently aroused in some quarters-that no one in the government or the diplomatic community is certain what will happen.

"War between Argentina and Chile makes no sense. It would be irrational" said one diplomatic observer. "But that doesn't mean it couldn't happen. Whos knows?"

The three islands in question are Picton, Lennox and Nueva. An 1893 boundary protocol gave Chile the islands south of the Beagle Channel to Cape Horn. The question has been, does this channel, named for the vessel of 19th century naturalist Charles Darwin, enter the Atlantic north or south of the islands?

In 1971, both countries agreed to put the question to arbitration by the British crown, which had prevented an earlier war between the Andean neighbors by undertaking to survey their lengthy land border.

A special tribunal, selected by the two countries from among members of the World Court, assisted Britain through six years of study that resulted in an award of the three islands to Chile.

The arbitration agreement had specified that there could be no appeal, and both sides were to comply within nine months. Just before that deadline, earlier this year, Argentina declared its rejection of the decision, and the latest round of negotiations began.

Part of the problem for months had been that different spokesmen for the Argentine government have been saying different things. One day a general sayd the negotiations are going well and that Argentina wants peace. But the next day, someone else of equal rank and authority says things are going badly and that Argentina must be prepared to fight.

A source close to Argentine President Jorge Videla said late last week that the negotiations, now being held in Chile, "are going very well" and that it now looked as if a compromise may be reached before the Thursday deadline for ending the talks.

This source said that most of the issues have been resolved and an agreement reached that would provide for joint development of oil or other resources found within the waters claimed by both countries.

The only remaining problem, according to this source, is whether Argentina gets sovereignty over a few tiny islands south of the three Beagle islands, which would buttress Argentine claims to the disputed waters-and to Antarctica-in case Chile later attempted to break the negotiated settlement.

Argentina would also like a small part of one of the Beagle Islands, Neuva, and a small part of Cabo de Hornos Island now clearly Chile's. But the source indicated that sovereignty over two tiny islands in between, Evout and Barnevelt, would probably be sufficient to avoid a stalemate.

Meanwhile, Chile and Argentina have bought vast amounts of arms over the past eight months. According to some sources, Chile has spent $500 million and Argentina $750 million.

The Argentines have been far more public about their preparations, largely because they have been engaged in a psychological war, trying to convince the Chileans-who have the arbitration award and international law on their side-to compromise rather than maintain a legalistic position.

Argentina has placed 500,000 reservists on alert, has moved large numbers of troops and equipment to the south, has beefed up troops along the 2,000-mile border with Chile and has ordered some clothing factories and drug companies to produce only for military consumption.

Chile has not, publicly at least, engaged in elaborate preparations, probably because it would go immediately to the Organization of American States and the International Court at The Hague should Argentina seize land which the arbitration award, signed by Queen Elizabeth II, gave to Chile.

Here in Buenos Aires, people seem to be split over whether it is worth the risk of war to assert Argentine sovereignty over some faraway islands.

During the blackout, some people were overheart yelling, "Turn out the lights, Chilean" to persons whose blinds were not drawn tightly enough. But others laughed at the whole exercise.

"Suppose it's good for lovers, if nothing else," said one woman who wasn't taking the air raid drill with quite the seriousness that the Argentine government expected.