The State Department urged the Civil Aeronautics Board yesterday to set aside for a year its controversial review of the fare-setting activities of the International Air Transport Association, the trade organization of 103 world airlines.

Last month, the board granted temporary approval to a proposed restructuring of IATA while it continues to decide whether IATA's rate-setting functions should continue to receive U.S. antitrust immunity. The liberalized organization allows member airlines to participate in trade association activities without joining the traffic conferences that discuss fares.

In a petition filed with the board, State agreed with IATA that the board's planned timetable did not permit "a fair working test" of the revisited IATA operating procedures.

As it stands now - with the board scheduled to take written and oral testimony this summer and make a decision in October - the new procedures will become effective just as a final decision would be made, perhaps removing the antitrust exemption and thus effectively taking U.S. carriers out of the organization.

"Given the strong international support for the new IATA procedures and the real possibility - as strongly argued by IATA - that U.S. aviation interests can be better advanced in the context of the new IATA rather than it its absence, a one-year stay of proceedings is warranted," the State Department said in a letter.

It was signed by James R. Atwood, deputy assistant secretary of State for transportation affairs, and Franklin K. Wills, assistant legal adviser for economic and business affairs.

Although State said a one-year delay would represent a substantial concession by the CAB, it said IATA had strong support worldwide and suggested that developments over the last 18 months demonstrated that U.S. initiatives and competitive fares "are possible within the existing international framework."

Of the board won't go along with a one-year delay, State urged at least a three-month delay to give foreign governments that have requested it a chance for diplomatic consultations with the U.S.

In another international air travel development, U.S. airlines are up in arms over an application by Iceland for direct Icelandic Airlines flights from the United States to Luxembourg. Currently, Icelandic, which flies from Baltimore-washington International Airport, among others, has to stop in Iceland.