Everyone at the Keeneland Yearling Sale knew that the colt who was led into the auction ring late Tuesday night had impeccable credentials. He was a son of the greatest stallion in the world, Northern Dancer, and a mare who had previously produced two top stakes winners. He looked magnificent, too; conformation experts agreed that he was one of the best yearlings they had seen in years.

And yet nobody at Keeneland--nobody in the whole racing world, in fact--could have imagined what was going to happen when the bidding began.

One million! Two million! Three million! Four million! Five million! In the matter of a minute or so, the colt had become the most expensive yearling in history, surpassing the old record of $4.25 million. Now that the riffraff had been driven out of the bidding, the big boys were ready to get serious.

The two remaining bidders were standing in an area just behind the sales pavilion. On one side was Joss Collins, representing Robert Sangster and his associates. On the other was Col. Dick Worden, a bloodstock agent representing Sheik Muhammed al Maktoum. Alternatively they nodded at the bid-spotter, raising the price by hundreds of thousands per nod.

At the $8 million level, the auctioneer joked, "We may have to cut another hole in the board," referring to the fact that there was room for only seven digits on Keeneland's electronic board that shows the amount of the latest bid. When it was built, not even the wildest optimist at the sales company could have dreamed that he would live long enough to see an eight-figure yearling.

But when Sangster's man bid $10 million, the sheik's man was undaunted and bid $10.2 million. Sangster's man signaled unequivocally that he was finished and the auctioneer's hammer fell. As the crowd buzzed in disbelief, Sheik Maktoum left the pavilion quickly and went directly to the Lexington airport where his private 727 jet was waiting to take him home to Dubai in the United Arab Emirates.

His record purchase climaxed a sale that stunned even people who thought they were finally jaded by the ever-rising price of thoroughbred horseflesh. Only a few years ago the sale of a $500,000 yearling would trigger a wave of excitement through any sales pavilion. At Keeneland on Monday and Tuesday, the average price for a yearling was $501,495, a figure not due so much to broad-based strength in the market as to the activities of Sangster and the Arabs.

This whole yearling boom began with Sangster, who perceived in the mid-1970s that the prevailing prices for the best bloodstock were a great bargain. He was right, and dominated the market until different Arab groups started to challenge him and to drive prices to astonishing levels.

But as high as the prices were, they were not irrational. Before the Keeneland sale, The Washington Post asked the industry newsletter Racing Update for its help in evaluating the performance and present value of the most expensive yearlings who were sold in 1980. The top 21 cost a staggering $37 million, but today they are worth more than $70 million. Good horses were still cheap.

But they were not cheap at Keeneland this week. Even if the son of Northern Dancer and My Bupers grew up to be the best horse in the world, he might be worth $40 million when he was syndicated for stud duty. Getting odds of 3 to 1 on the proposition that a horse will grow up to be a great champion could not possibly be a rational investment.

"What happened at Keeneland was beyond investment, beyond sport," said Bill Oppenheim, the editor of Racing Update. "It was a case of people saying, 'I'm going to stare you down and I'm going to win.' "

Conflicts of ego have always fueled thoroughbred auctions, but never have the combatants had such large bankrolls to match their egos. The conflict has been building ever since the Arabs challenged Sangster and outbid him in 1981 for the most coveted individual in the Keeneland sale. "Last year," Oppenheim said, "Sangster came to the sale saying, 'These Arabs have no heart; I'll teach them how to bid.' This year the Arabs came saying, 'We're not going to lose face to that man again.' And Sangster was probably saying, 'Well, then, we'll take these SOBs to the moon.'

"What they were doing on Tuesday," Oppenheim said, "had nothing to do with financial responsibility. It had nothing to do with the real world. It was the gunfight at the OK Corral."

Part of jockey Steve Cauthen's payment for riding Affirmed to the Triple Crown five years ago was a breeding share. His first installment came this week at Keeneland--$385,000--when he sold a colt by Affirmed out of the mare Amaranda.