China, despite repeated denials, is selling weapons in large and increasing quantities to Iran, diplomats said here today.

The diplomats said the weapons have increased in quantity and value over the past year or two.

The diplomats did not have a total dollar value for the weapons sold, but they said an estimate of $1.6 billion in recent sales, a figure that appeared in the latest issue of The Military Balance, 1985-86, published by the International Institute of Strategic Studies in London, was credible. The sales were agreed to early last year, the London institute said.

The institute said China had also sold weapons to Iraq, which has been locked in a costly, protracted war with Iran, thus making China, like North Korea, a supplier to both sides in that war.

Not long ago, estimates of China's total arms sales to all overseas customers came to little more than $1 billion. But the Chinese have been moving aggressively in this field, selling not only to Middle Eastern countries but also seeking markets throughout the Third World. Their latest target for overseas arms sales appears to be Latin America.

The institute listed China as a primary supplier to Iran, providing the Iranians with J6 interceptor jets, T59 tanks, artillery and surface-to-air missiles under an agreement that it said was concluded in March 1985.

The report said Iran also received arms, supplies and spare parts from Israel, North Korea, Eastern Europe, Argentina and Switzerland, among other countries. It said Iran also buys materials on the open market in Western Europe.

"Some Chinese weapons have been identified in Iranian service," the report said.

It said Iraq "has apparently received arms from Egypt, the Soviet Union, China, North Korea, France, Portugal and Brazil."

Chinese weapons are cheaper and easier to operate and maintain than weapons sold by western nations, making them a more attractive buy for many Third World countries.

The Chinese have been denying reports of arms sales to Iran since the early 1980s. The latest denial came at a regular press briefing in Peking on Wednesday. Foreign Ministry spokesman Ma Yuzhen, when asked about the report, recalled earlier denials and said China "strictly abides by the principle of neutrality in the Iran-Iraq war."

But both western and Asian diplomats in Peking have said in the last year that they were certain China had been selling conventional weapons to Iran for several years. They said the purpose appeared to be twofold: to earn foreign exchange for China's economic modernization program and to assure Chinese influence in a key part of the Middle East.

A western businessman here knowledgeable about the arms industry has said that if the Chinese can continue to increase their overseas arms sales they will earn more foreign exchange and will be in a better position to buy sophisticated military equipment from abroad of the type that they cannot yet produce themselves.

According to a report published in The Washington Post in the spring of 1984, China began secretly supplying arms to Iran by way of North Korea sometime after mid-1982. Diplomats said late last year that this channel continued to be used, possibly along with others.

By funneling arms through North Korea, the Chinese could deny making direct arms deliveries to Iran.

Arms deliveries to Iran from China from 1982 to 1984 were said to include fighter planes, tanks, artillery pieces and light infantry weapons. In April 1984, the Chinese Foreign Ministry denied that China was selling arms to Iran by way of North Korea.