With the unexpected gusto of stockyard brawlers, Republican Sen. Charles H. Percy and Democratic Rep. Paul Simon have transformed their nip-and-tuck contest for Percy's seat into an old-fashioned political slugfest.

On Thursday night, minutes after it began, their only televised debate erupted into a finger-pointing confrontation that triggered catcalls and cheers from the audience, which had come expecting a low-key discussion of the debt and foreign policy by two men noted for their buttoned-down moderation.

The usually mild-mannered Simon, ignoring an opening question about events abroad, denounced Percy as a liar, guilty of "sleazy" television advertising. Wagging his finger at Percy while the three-term Republican incumbent stared back with a small smile on his face, Simon described a Percy television ad as "crude, intentionally distorting . . . . You have lied to the people of Illinois."

Brushing aside the Democrat's demand that he withdraw the commercial, Percy retorted, "No apologies needed. I can see why you're embarrassed by it." The ad charges that Simon has proposed the biggest tax increase ever by a member of Congress. Simon is "the ultimate tax man . . . addicted to taxes," Percy declared.

The exchanges continued throughout the one-hour debate, and they underscore the campaign's embittered turn.

Simon, whose primary election victory last March over three other Democrats was quite close, has discarded his usual stump style of philosophizing and gently disagreeing with opponents. A former lieutenant governor and four-term member of Congress from the "Little Egypt" district in the southern end of the state, Simon has shown a flair for aggressive politicking.

For example, he forced Percy on the defensive by demanding that Percy disclose his income-tax returns, then denounced the well-heeled industrialist for paying too little.

Percy has turned to the right as never before in his 18-year political career. Once the darling of the moderate Rockefeller wing of the Republican Party, he has put all of that behind him and now passionately embraces President Reagan and the White House campaign themes of a strong America.

Percy calls Simon a preacher of "gloom and doom" and credits Reagan with leading the nation to economic recovery. Though he is 65, Percy has campaigned almost nonstop for more than a year, to shed his image as an aloof officeholder.

The race is being closely watched nationally for several reasons. The Illinois seat, held by Percy since 1966, may prove crucial to Republican hopes of retaining the Senate majority gained by the GOP four years ago. Recent polls have indicated that the party could have trouble keeping its 55-to-45 lead over Senate Democrats.

At the same time, many Republican conservatives have not forgiven Percy for his moderate past; they want him defeated.

They also harbor hope that, if Sen. Jesse Helms (R-N.C.) wins reelection in his hard-fought campaign with Gov. James B. Hunt Jr., and the Republicans keep Senate control, Helms will choose to succeed Percy as Senate Foreign Relations Committee chairman instead of remaining Agriculture Committee chairman, which he tells North Carolinians he favors.

Polls show that Percy and Simon are virtually neck and neck. A Chicago Tribune survey at the beginning of October gave Simon a razor-thin 42-to-40 percent lead over Percy, with 18 percent undecided.

A tough, well-financed Percy television-ad blitz has been reflected in recent polls as a slight edge for the incumbent. But the race now is considered too close to call despite that Reagan continues to enjoy a comfortable margin of between 15 and 18 percentage points over former vice president Walter F. Mondale in the polls.

Each campaign is spending about $3 million, mostly for television campaigns that have brought unprecedented negative advertising to Illinois. Percy's commercials feature "Simon Says . . . . Simon Does . . . . " comparisons of the congressman's record. "Compare what Paul Simon says to what Paul Simon actually does. The difference is startling," they say.

Simon's ads ridicule Percy for allying himself so closely with the president. "Where will Charles Percy stand tomorrow?" the ads demand. "Only his pollster knows . . . . "

But Illinois elections are difficult to predict because of its long tradition as a swing state. Although its 8 million voters usually vote for the presidential winner, they demonstrate a stubborn streak of independence in statewide elections.

For example, the state's junior senator, Democrat Alan J. Dixon, crushed his GOP opponent in 1980 while Reagan was defeating President Jimmy Carter by nearly 400,000 votes.

In the days remaining before the Nov. 6 election, Simon plans to continue wooing votes in heavily white-collar suburban counties around Chicago. He enjoys the support of Mayor Harold Washington and Cook County Democratic Chairman Edward R. Vrdolyak, who are locked in their own protracted feud.

Percy's chief task in the city is to bring back the lakefront vote and the North Side Jewish vote. Angered by his support of arms sales to Arab countries and by his criticism of Israeli governments, Jews have worked hard to defeat Percy.