The fighting between Iran and Iraq erupted into a full-scale war yesterday with Iranian warplanes bombing of an Iraq capital of Baghdad and Iraq moving its ground forces into Iran to encircle three towns and set fire to the world's largest oil refinery at Abadan.

Waves of Iranian jets bombed Baghdad and other Iraqi military and industrial targets throughout the day, and the Iraqi government reported 47 Iraqis killed and 116 wounded. Other unconfirmed diplomatic reports said four American and four British technicians were killed during the Iranian bombing of an Iraqi petrochemical complex near the port city of Basra.

With the bombing and shelling of oil and other industrial facilities by both sides and the movement of apparently large numbers of Iraqi ground troops into Iran to seize cities and land, the character of the week-long fighting changed dramatically from the small border squabble it had once been.

Iraq announced that one of its objectives was "to bread the racist government" of the Iranian leader, Ayatollah Ruhollah Khomeini, raising the stakes in the conflict to include not only territory, but the rival governments themselves.

There were some indications that the fighting might have escalated beyond either country's initial expectation as each took retaliatory action in response to attacks and actions by the other.

The United Nations Security Council called on Iran and Iraq last night to stop shooting and settle their dispute peacefully. After spending the afternoon and much of the evening deliberating, the council approved a statement calling on the combatants "as a first step toward a solution . . . to desist from all armed activity and all acts that may worsen the present dangerous situation . . . ."

Although U.S. Secretary of State Edmund Muskie was scheduled to participate in the meeting, he later decided not to. Muskie canceled his Wednesday schedule in New York to fly back to Washington for what were described as "urgent" meetings, presumably on the Iranian-Iraqi situation.

The first signs of the war's effects on the shipment of oil to the West appeared with the virtual halt of seagoing traffic from Iranian and Iraqi ports and reports that some tankers were refusing to enter the Persian Gulf altogether, although others were said to be continuing their deliveries normally.

Early yesterday, Baghdad radio claimed that Iran had released all 52 American hostages unconditionally, but Tehran later denounced the statement as Iraqi propaganda. It did say, however, that hostages located in six different cities were being moved to other areas for their own safekeeping and that the hostage issue "has been frozen indefinitely."

In launching its early-morning ground attacks into Iran, Iraq said it was acting in retaliation for the "unlawful and irresponsible [Iranian] closure of the Hormuz Strait," which Iraqi President Saddam Hussein characterized early yesterday morning as a "declaration of war."

The Iraqi leader was reacting to an Iranian communique yesterday that "all waterways near Iranian shores are declared war zones" and that Iran would "not allow any merchant ships to carry cargo to Iraqi ports."

By the end of the day, Iraqi comuniques said its invading tanks and troops had "advanced to take control of vital positions" inside Iran and that they had "encircled and cut off completely" the Iranian cities of Abadan and nearby Khorramshahr in the disputed Shatt-al-Arab estuary, the strategic waterway between the two countries leading into the Persian Gulf.

The Iraqi war communiques also said that the Iranian town of Qasr Shirin, 350 miles to the north, was "surrounded on all sides by our forces" and that a fourth area identified as Sumar had "fallen into the hands of our brave troops."

"Our forces have achieved just victory against our foes," the Iraqi statement said about the four attacks.

U.S. government sources involved in monitoring the course of the fighting said yesterday that Iraq now had roughly three Army divisions in the contested border region with Iran and was moving another three divisions out of garrison positions in the rear and toward the war zones.

Thus far, the assessment of U.S. military specialist is that Iraq is probably planning primarily to hold onto the disputed territory around the Shatt-al-Arab waterway rather than Launch a full-scale invasion of Iran. This assessment is based on the fact that American intelligence agencies have thus far not spotted any big logistical or supply buildup behind the Iraqi ground forces necessary for a sustained, wider battle.

On the other hand, the prevailing U.S. view yesterday was that a major ground attack by Iraqi forces such as apparently has occurred would not take place for the same reasons.

The Iraqis claimed by the end of yesterday also to have shot down a total of 67 Iranian planes, 35 of them during the Iranian attacks on Iraqi cities and military sites yesterday afternoon. Iran, for its part, said it had downed a total of 34 Iraqi Migs and had destroyed a "considerable number" of others on the ground in raids on Iraqi airfields.

There was no independent confirmation of these reports possible, and the outside world was once again left to follow the course of the war by sifting through the often conflicting official communiques coming from the two warring sides' capitals and a few scant eyewitness accounts of the air attacks on Baghdad and from ship captains stranded in the Shatt-al-Arab.

One such account confirmed that the giant Iranian refinery at Abadan had been attacked repeated by Iraqi planes and artillery and was ablaze with its storage tanks mostly destroyed. The account, monitored by the British Broadcasting Corp. in London, said at least eight Iraqi planes had bombed the refinery Monday night and another five yesterday.

The BBC later quoted Tehran radio as saying the Iranian government had ordered a complete shutdown of the refinery because of the damage of it.

Later, the official Iraqi news agency quoted an armbed forces command communique as saying "our gallant forces destroyed and set ablaze oil installations at Abadan."

As the war took a turn for the worse, Farah Diba, the widow of the late shah, Mohammad Reza Pahlavi, issued a statement in Paris and Washington appealing to all Iranians to put aside their differences in the current crisis and "labor together to try and save our country" from the invading Iraqis.

Yesterday's war began with the movement of Iraqi forces across the Iranian border at 3 a.m. local time at three or four different points. The land offensive was said by Iraqi diplomats in Ankara, Turkey, to have started off by the ferrying of troops and tanks across the Shatt-al-Arab toward Abadan under the cover of air fire.

Then at dawn, Iran launched the first of a series of raids on Baghdad and nine other sites, including Iraq's second largest city and port, Basra, Mosul, Ninevah, and another Iraqi port 30 miles south of Basra, Umm Qasr. m

The Iraqui news agency, reporting on the attacks, said "many men, women and children" were among the 47 Iraqis killed and 116 wounded by the bombings.It said 18 civilians were killed and 40 others wounded in north Baghdad and the city's industrial suburb.

Another 28 were reported killed and 50 wounded in the Iranian bombing of Basra port, where the eight American and British technicians also lost their lives. One of the Iranian targets at Basra was the large, nearby Zubair petrochemical complex being built by the C-E Lummus subsidiary of Combustion Engineering, Inc., which employs 300 Americans.

Names of the dead Americans were not immediately made known pending notification of their next of kin.

Throughout the day, Iraqi and Iranian warplanes flew sorties against targets in the other's country, with scores reported downed either in dogfights or by ground-to-air missiles. Of 67 Iranian planes Iraq claimed to have shot down since the start of the conflict, 20 were said to have been hit while attacking six Iraqi cities -- seven over Mosul, five over Basra, and four other over Baghdad.

There were far fewer war bulletins coming from Tehran throughout yesterday.

But Tehran radio, in addition to confirming the air attacks on 10 Iraqi cities and airfields, reported that Iranian artillery destroyed Iraqi oil installations and gas refinery at AL Faw, on the Iraqi side of the Shatt-al-Arab, and "severely bombed" the Iraqi port of Umm Qasr. It also said five Iraqi Migs were shot down, bringing the total number reported to 34 since the fighting began last week.

Tehran were largely silent on ground fighting under way. But a local Iranian official in the office of the government of Khorramshahr largely confirmed earlier in the day Iraqi claims that they had surrounded the town.

Khorramshahr and Abadan are the major cities of Iran's oil-rich southern Khuzestan Province, which Iraq once claimed because of the large Arab population there.

It is still not clear whether Iraq intends to push on into the province.

A french news agency dispatch said the Iraqi government had handed out a statement to Kuwaiti newsmen in Baghdad listing Iraq's conditions for ending the fighting with Iran. These included Iranian recognition of Iraqi sovereignty and legal rights over the Shatt-al-Arab, the return of three small islands now in Iranian possession near the Strait of Hormuz and Iranian respect of Iraqi sovereignty over its territory bordering on Iran.

"Iraq is waging a liberation war against Iran." Agence France-Presse quoted Hahhan Tawalbah, director of the Iraqi news agency, as telling the Kuwaiti newsmen.

He was also reported to have said that Iraq had so far recaptured 147 square miles of territory that Iraq claims Iran has seized from it.

The list of Iraqi demands as reported by the French news agency seemed to suggest Iraq has plans to continue and even spread the fighting to other areas, notably to the three islands near the Hormu Strait claimed by Iraq.

There was not other indication, however, that this was indeed its intention in the next few days.