The Washington Bullets were perfect foils for the New York Knicks last night.

The Knicks entered Capital Centre with a team-record 12-game losing streak over two seasons, seven losses coming this season. But they capitalized on mistakes by the Bullets to come away with an 88-87 victory.

The Bullets' second straight defeat, and third in four games, left Coach Gene Shue perplexed at his team's shoddy offensive showing.

"We came back in the end, but we dug ourselves into such a hole," Shue said. "We just aren't functioning right. We aren't scoring enough points to win. We aren't getting the job done."

The largest home crowd of the season, 16,048, was on hand, but the attendance was influenced by the closed-circuit telecast of the Aaron Pryor-Alexis Arguello fight shown on TelScreen immediately after the game.

After trailing by six points with 41 seconds remaining, the Bullets still had a chance to tie the score with six seconds left. But Billy Ray Bates made only the second of two free throws and the Knicks had their first victory of the season.

"It was a victory we needed," said New York Coach Hubie Brown. "It takes the pressure off everyone--management, the coaches and the kids."

Bernard King and Bill Cartwright each had 19 points and Paul Westphal had 15.

Greg Ballard was high scorer for the Bullets with 22 points. Jeff Ruland and Bates had 14 apiece.

New York had what appeared to be a safe 87-81 lead with King at the foul line with two free throws and 41 seconds left.

He missed both shots, however, and Ballard's layup cut the lead to 87-83 with 25 seconds left. Frank Johnson fouled Sly Williams three seconds later, but Williams made only one of two shots. The Bullets hurried the ball upcourt, and Ballard made a 27-foot three-point shot that cut the advantage to 88-86 with 20 seconds remaining.

As soon as New York passed the ball inbounds, Ballard fouled Williams. He missed both free throws, and after a scramble for the rebound, a jump ball was called between Cartwright and the Bullets' Rick Mahorn.

Mahorn controlled the tap to Bates and the Bullets called their final timeout with 10 seconds left.

They ran a play for Bates, and as he drove down the lane around Ernie Grunfeld, Truck Robinson fouled him.

Bates' first foul shot was long and bounded off the back iron. He made the second shot and the Knicks called time with six seconds left to get the ball at midcourt.

Grunfeld passed inbounds to Westphal, but the ball went through his hands to Don Collins under the Bullets' basket with four seconds left. Collins had just enough time to dribble the ball to within his shooting range, but his forced 20-footer was off line.

Again, the Bullets' guards had major problems. Point guard Johnson, who is slumping badly, got into early foul trouble; he made only one of eight shots and had five turnovers. The other starter, Bryan Warwick, missed his only shot.

With John Lucas and Bates his only effective guard combination, Shue said he was contemplating changes for the nationally televised game Sunday at Philadelphia (WDVM-TV-9, 3:30).

"We were getting confused on offense, beaten on defense and just making the wrong decisions all night long," said Bates.

The Bullets ended the third quarter with an 18-2 run -- with Bates ending the run with breakaway dunks after steals by Lucas -- to turn a 63-49 deficit into a 67-65 lead.

The Bullets had a 70-67 lead when the Knicks got consecutive baskets from Louis Orr, Edmund Sherod and Westphal to regain the lead, 73-70, with 7:10 remaining. They never trailed again.