An arbitrated dispute with the government of Israel will take a big bite out of the current quarterly earnings of Sperry Corp. of New York. Sperry's after-tax profits for its third quarter, which ends on Monday, will be reduced by $12.7 million (23 cents a share) by a commercial arbitration service's decision in a dispute over a 1978 military-products contract with Israel.

As a result, profits in the current quarter are expected to fall below those reported in the same quarter last year -- net earnings of $1.42 a share and earnings on continuing operations of $1.32 a share -- Sperry spokesman Peter Hines said.

The dispute with the Israeli government involved military communications equipment made by Sperry's defense-products group in St. Paul, Minn., Hines said, but few details about the size or terms of the agreement were available.

Hines said the $12.7 million charge-off included both the payment Sperry must make to the Israeli government and the legal fees incurred during the lengthy litigation.

The charge-off is the second the corporation has made in this fiscal year. In Sperry's first quarter, which ended June 30, its after-tax earnings were reduced by $21.8 million (40 cents) to reflect losses on its $40 million investment in Trilogy Ltd. of Cupertino, Calif.

The Trilogy venture had been aimed at underwriting development of a new semiconductor chip, an endeavor that Trilogy has abandoned.