A mysterious item appeared on the front page of La Razon, an afternoon newspaper here, on May 5. "The Hermes Sunk?" was the headline on the story, which said that, according to the Soviet news agency Tass, the British aircraft carrier had been bombed and sunk by Argentine airplanes.

The Argentine junta made no official comment. But in the press room of the Sheraton Hotel, an Air Force official confided, "We did it with a little Pucara plane that dropped six bombs and 32 rockets. We think the Hermes is severely damaged."

In the last two weeks, not a day has passed without speculation in the news media over the fate of the Hermes, the pride of the British Navy and flagship of its task force in the South Atlantic.

In a government film shown on all television stations last week, a raft and lifejackets imprinted "Hermes 554" were shown abandoned on the shore of the Falklands while a commentator asked breathlessly, "Is this a sign of the sinking of the Hermes?"

Britain has repeatedly labeled such reports as "ridiculous," and British correspondents aboard the aircraft carrier, albeit under censorship rules, report nothing is amiss. But most Argentines, even normally skeptical journalists, are convinced that the Hermes is disabled.

The conflicting reports are symptomatic of the confusion that reigns in this capital, more than 1,000 miles from the combat zone, where about 700 foreign correspondents have gathered to cover what is effectively an invisible war.

A propaganda campaign whipped up by the military junta--coupled with secrecy over what is actually happening in the Falklands--has blurred the lines between news and rumor, lending a surreal quality to the conflict as it is perceived in Argentina.

The propaganda may be discouraging a peaceful settlement of the war. "The military is manipulating public opinion," said a journalist for a prominent Argentine magazine. "They are preparing the public for war, not for negotiations. The Navy does not want to negotiate--it has lost too many men. It wants to regain its honor. Our diplomats feel that the propaganda campaign is very detrimental to the progress of negotiations."

The military, which controls several major newspapers and all television stations, has sought to give the impression that Argentina is winning. "Argentina to win!" radio announcers repeatedly shout, as they harangue the public with patriotic exhortations and martial music. The cover of Gente, a leading magazine, declares, "We are winning!"

A few weeks ago, the junta issued "self-censorship guidelines" declaring that journalists would be jailed for publishing information that "produces panic," "contradicts or lessens the credibility of official information," or "undermines the belief in Argentine rights."

Osiris Troiani, a political commentator on Radio Continental, an independent station, was dismissed for a broadcast that did not adhere to the official line.

"Our own government is blockading itself through a complete lack of information," Maximo Gainza, editor of the prominent daily La Prensa. "No independent news organization has correspondents on the islands. The government news agency, Telam, sends trash. At least Joseph Goebbels called his operation in Nazi Germany the 'Ministry of Propaganda.' "

The government media campaign is seeking to reinforce the notion that Britain is the colonialist aggressor. Prime Minister Margaret Thatcher was pictured this week in the tabloid Tal Cual dressed in a Nazi uniform under the headline, "Worse Than Hitler." Editorials emphasized that Argentina took the islands April 2 without bloodshed. Published reports quoting "military sources" suggest that the temporary abduction of three British journalists last week was an Anglo-American plot to embarrass the junta, although there were numerous indications that the kidnapers were government security forces.

News from the front portrays Britain as vicious and bloodthirsty. The junta issued a press release May 9 declaring that British aircraft had sunk an unarmed Argentine fishing boat, machine-gunning lifeboats full of survivors "with a treachery hitherto unknown in the history of war at sea."

Not until five days later did the boat's owners confirm that only one sailor had died in the attack, while the British had rescued the rest of the crew. The boat was attacked inside the total exclusion zone declared around the islands by the British, who said they found spying equipment on board the vessel.

Press restrictions are hurting foreign journalists as well as Argentine ones. Three foreign correspondents, including a Newsweek reporter and two Norwegians, were expelled Wednesday for "endangering national security" with their writings. Three British journalists charged with spying have languished in jail for several weeks.

The almost complete inaccessibility of military officials to foreign journalists reduces many correspondents here, some of whom speak no Spanish, to gleaning their reports from translations of the "self-censored" Argentine newspapers.

"Sometimes I just listen to the news from the BBC," said one American newsman, tapping his shortwave radio affectionately, "and I report it from Buenos Aires."

TV reporters compare the "lousy photo opportunities" here with pictures out of Britain of troops training and Thatcher at 10 Downing Street. "The Argentines don't know how to manipulate us" with public relations, complained one U.S. network producer.

The networks, however, have proved adept at manipulating the Argentines. NBC somehow got a trip to the islands for five hours. It won't say how. ABC got access to government film of the war, a day before everyone else, reportedly from a source close to the military.

"Somebody's making a pile of money," grumbled one network correspondent.

One prominent Argentine reporter attributes "the exaggerated triumphalism" of the propaganda campaign to an effort by the military "to clean themselves after the dirty war." The "dirty war" is what people here call the government's antiguerrilla campaign of the 1970s, in which about 6,000 Argentine citizens were abducted by plainclothesmen and vanished without a trace.

The new "dirty war" is the one waged by Britain in sinking the cruiser General Belgrano outside the war zone and dropping antipersonnel bombs in the Falklands.

Argentines also point out that Britain too appears to be waging a psychological campaign in its often less-than-candid reports. "Neither side has been very democratic about the handling of news," editorialized the English-language Buenos Aires Herald. The British, for example, repeatedly declined to comment on Argentina's claim that its troops had repulsed attempted helicopter landings on the Falklands.

Some Argentine newspapers have openly scorned the censorship guidelines. Nonetheless, Gainza said La Prensa was the only one refusing to carry a free government advertisement bearing a thumbs-up fist labeled, "Argentina, we'll conquer."

"This idea that we can win against the British and the U.S. is very dangerous," he said. "We need a cease-fire. Yet no one dares to stop the psychological warfare."