Although it boasts one of the world's most handsome waterfront skylines, this queen city of Lake Michigan is decidedly landlocked: Nearly 2,000 nautical miles of fresh water and many canal locks separate the midcontinental metropolis from salt water.

But in the kind of audacious move for which it is famed, Chicago has convinced a distant court that the city stands on an "arm of the sea."

Though master mariners may want to reach for their grog, the State Supreme Court of New York has swallowed the Chicagoans' arguments that because the Great Lakes are connected to the Atlantic by the St. Lawrence Seaway, Lake Michigan is indeed an extension of the great ocean.

The Sept. 4 verdict brought joy to the Chicago Yacht Club -- for the club has launched its first challenge for international sailing's most hallowed prize: the America's Cup.

Named after the schooner America, which first won it in 1851, the cup had been held by the United States through 25 ocean regattas stretching over the past 133 years.

The longest winning streak in world sports ended last autumn, however, when Australia II, fitted with a bizarre winged keel, defeated Liberty, the U.S. cup defender, in races off Newport, R.I.

The next challenge is to be in 1987, in the Indian Ocean off western Australia. Those waters, seldom seen by Americans or much of the rest of the world, are the home territory of the Royal Perth Yacht Club, which organized the winning challenge.

The deed of gift governing America's Cup competition since 1887 stipulates that only yacht clubs that "hold their regattas on the sea or an arm of the sea" may compete for the trophy. So when Chicagoans joined the pell-mell rush to recover the cup from the Aussies, they first had to settle the question of where Chicago stood in the world.

Local decks are now cleared for a full-scale effort to win back the cup in 1987 and then defend it in a 1991 challenge on Lake Michigan -- an extravaganza that backers say could bring 50 million tourist dollars to the Windy City.

"With the arm-of-the-sea question behind us, we can move forward quickly," said Lee Hutchinson, one of the Chicago challenge principals.

The first requirement is money -- plenty of it. If horse racing is the sport of kings, blue-water yacht racing is the sport of kings' bankers. Hutchinson estimates that it will take a minimum of $2.5 million to bankroll the first half of the effort through the end of 1985 or early 1986. Another $3 million to $4 million would be needed to continue the challenge through the America's Cup races themselves -- if the Chicagoans get that far.

Beyond the formidable question of money lie enough shoals to daunt the resolution of any Horatio Hornblower, freshwater or saltwater. To start with, a boat must be designed and built to the requirements of the so-called 12-meter rule, one of the trickiest assignments in yachting. For every fabled greyhound racing ahead under a cloud of sail, a squadron of expensive clunkers lies at anchor.

But the Chicagoans are confident they have lined up the talent to overcome this initial obstacle. A local firm, Graham & Schlageter, designers of award-winning Great Lakes racers, will act as design consultants. Olympic gold medal sailor Buddy Melges of Zenda, Wis., has agreed to skipper the new boat.

Crew selection and training are expected to proceed easily: The marinas of Chicago and most other cities on the Great Lakes -- America's inland sea -- are jammed with big, fast, expensive yachts owned and raced by rich, competitive men who like to win at what they do and know how to pick winners to help them do it.

But in 12-meter competition, this is just a beginning. Already, 20 other challengers have anted up the $11,472 entry fee required by the Royal Perth's America's Cup committee to enter the 1987 lists. These include seven other U.S. organizations, four Italian, three French, two Canadian and one each from West Germany, Switzerland, Great Britain and New Zealand.

Although several are expected to drop out within a year, the survivors must compete in match elimination races for the privilege of facing the Australians. Those races are to be conducted in 1986 off Sardinia by the Club Smeralda, a creation of the Aga Khan, whose bankroll is more than equal to the task.

Meanwhile, four or five Australian challenge groups are being organized to compete for the privilege of defending the cup. Several other foreign entrants are likely, according to Dr. Stan Reid, a wealthy Perth gynecologist-obstetrician who is chairman of the club's cup committee.

"It's a mahvelous thing for syling, great that so many are so interested," Reid said in a recent telephone conversation across 13 time zones, two seasons, the International Date Line and the Equator.

Reid, immediate past commodore of the Royal Perth ("founded the same year as the New York Yacht Club was incorporated -- 119 years ago, I believe"), said the Australians are "honored and delighted that so many have confidence in Australia as the organizer . . . . But we are happy the cup won't be moving around anywhere for some time to come."

And the Chicagoans are delighted to find themselves in ocean-going company.