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Give both cities at least 3-4 full days each, that lets you cover the city sights and squeeze in a day trip like the Blue Mountains or the Great Ocean Road.
The Metro is easy to use, and a single Bip! card works for both the Metro and the micros (buses). Once you figure out the card system, getting around is cheap and simple.
Recoleta is perfect for first two days of sightseeing. Then you can spend the rest of your time in Palermo. That way you get the history and the nightlife without having to move your luggage.