It sounds a bit like Filetto (you move an arrow and put coloured squares onto a grid) which is an Italian game. You don't really describe the game rules tho so we have little to go on.
That (despite looking like shit) was released in 1990 however so a whole decade out.
The problem is you're basically describing a puzzle game, and those didn't really even start to become popular in arcades until much later, you're also describing a colour game yet putting it in a period where real colour games (not overlays) were incredibly uncommon.
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Who knows this arcade game?
