HONG KONG will suffer from a gap in the law caused by the failure of the Sino-British Joint Liaison Group to complete its legal programme before 1997, according to a source close to the JLG negotiations. He revealed it was now impossible for the Government to complete work on matters such as extradition treaties and mutual legal assistance in the time remaining. ''There will certainly be damage to Hong Kong, but I can't tell you now what the damage will be or its scope,'' he said. He hoped legal experts, such as the head of the International Law Division, David Edwards, would continue to serve the post-1997 government to help formulate ways to minimise the damage resulting from the legal gap. Mr Edwards' division has been given the task of ensuring Hong Kong's exist ing international rights and obligations, and present statutes will remain in force after 1997. According to the source, the British JLG team - led by senior representative Hugh Davies - had repeatedly suggested to the Chinese side that time was running out, warning that any further delay would create a legal vacuum. Chinese officials, however, apparently did not share the urgency. One has accused the British side of being alarmist. He said, for instance, it was ''not a big deal'' if some agreements on exchange of fugitives were not concluded before 1997. Based on previous figures, the official argued that the number of criminals involved was small. But the source said the business community would be particularly anxious to be assured that the legal system remained intact. He said the major obstacle to a speedier solution to JLG matters was that China had always adopted a sceptical attitude towards suggestions made by Britain on transitional matters. In spite of a breakthrough on defence land negotiations in June, no major progress has been made on virtually all major outstanding issues. Government officials have revealed that about 210 British laws would have to be localised and passed by the Legislative Council before 1997 to maintain their validity after that date. No existing laws that should be adapted to dovetail with the relevant provisions in the Basic Law have been approved by the JLG, officials have said. The source revealed that the British side had proposed a series of expert discussions be held on matters ranging from international rights and obligations, air services agreements, immigration and localisation of laws. ''Unless we are able to hold experts' meetings we won't be able to achieve a lot at the next JLG meeting to be held in Beijing at the end of September,'' he warned.