The Falklands War between Britain and Argentina from April to June 1982 was an emotive political and ideological issue for the UK and its Prime Minister, who fought tirelessly to safeguard the Falkland islanders’ right to self-determination. The war represented a considerable financial and moral commitment by the British to the Falkland Islands and their 1,800 inhabitants in a time of significant economic uncertainty in the UK. Notwithstanding this, Britain's hegemony and influence over the islands was reasserted in the face of perceived Argentine aggression. Britain's victory was considered a great success in the UK given the strategic difficulties involved in orchestrating a war in a wind-swept archipelago nearly 8,000 miles from the British mainland, but a mere 400 miles from Argentina. Moreover, it helped to secure Thatcher's re-election the following year and was a source of national pride for the jubilant British public.

The war also had a significant impact upon the development of the Special Relationship under the guidance of Reagan and Thatcher and their subordinates. It was a test of US commitment to its ally, the UK. The US had traditionally viewed the South Atlantic region as peripheral in terms of hemispheric importance. It was sceptical of British colonial aspirations and was initially reluctant to actively support the UK. Britain's assumption of unqualified American support during the war was quickly disproved. The Reagan administration's initial declaration of neutrality led to scepticism within Parliament about the US commitment to the so-called Special Relationship and a distrust of its subsequent mediation efforts. In Argentina this neutrality was seen as evidence of US deference to its recently improved bilateral relationship with Washington. American neutrality was later withdrawn much to the delight of the Thatcher government, as it enabled the US to provide valuable material support to the UK (some intelligence support was provided by the US before the end of diplomatic neutrality, see section on US Material Support, below). However, the mediation process that preceded the US declaration of support for the British was not always satisfactory to either the US or the UK, and there were numerous instances of Anglo-American tension. These tensions invariably strained the development of transatlantic relations.