On a tree-dotted hillside in far Northwest Washington, a 12-year-old plan to create a new diplomatic neighborhood became a reality last week when Israel dedicated a spacious new embassy office building to replace cramped quarters in an old townhouse on historic Embassy Row.

By occupying its beige brick structure at an appropriately named new address, 3514 International Dr. NW, Israel became the first of at least 14 nations that will eventually locate diplomatic missions on a 26-acre section of the old National Bureau of Standards site off Connecticut Avenue. The Van Ness campus of the University of the District of Columbia occupies an adjacent part of the tract.

Designed like a carefully stacked mass of building blocks punctuated by graceful Mediterranean arches, the Israeli building -- in the words of Gideon Meir, the embassy's first secretary -- is intended "to give the feeling of Jerusalem."

That purpose is not without some unintended irony. Israel's future neighbors will include such Arab states as Bahrain, Kuwait, the United Arab Emirates, Jordan and Libya, all with varying degrees of hostility to the Jewish state. (In fact, the only non-Arab neighbor among those firmly committed to the project is the west African nation in Ghana.)

But that fact does not worry State Department officials, who have found themselves in unlikely roles as real estate developers and salesmen in bringing the new international center to reality.

Even when nations do not get along, their embassies in foreign capitals typically maintain proper, businesslike relationships, according to Richard Gookin, assistant chief of protocol for diplomatic liasion.

"After all, we will have the same neighbors here as we have in the Middle East," observed Israeli diplomatic Meir. "We will be good neighbors."

The creation of the new center -- long known in planning jargon as a "chancery enclave" -- was first officially proposed by the National Capital Planning Commission in 1967 as the Bureau of Standards was prepared to move to a huge new complex in upper Montgomery County. It was promoted as an answer to the pressing need for more chanceries, as embassy offices are called, in the face of tightened District of Columbia zoning restrictions that made available sites scarce.

Just last year, the D.C. City Council voted to outlaw all new chanceries in residentially zoned neighborhoods, a move that caused the State Department to persuade Congress to invoke its veto power for the first time to kill a council action.

When the chancery center was proposed, the number of nations represented diplomatically in Washington was burgeoning, as former colonies of the European powers gained independence. At the end of World War II in 1945, the United States recognized 56 nations. By 1980, the total was 142.

Congress in 1968 approved legislation setting aside 34 acres of the tract for the embassy project, including eight acres fronting on Connecticut Avenue at Tilden Street which was reserved for a New Organization of American States headquarters. OAS has since decided to stay near the White House, and the site is now ear-marked for Intelsat -- the 104-nation International Telecommunications Satellite Organization.

The congressional authorization put the State Department into partnership with the General Services Administration in developing the site and added the job of real estate salesmen to the duties of State's protocol officers.

It was a soft-sell and the job has been relatively easy, according to Harold Burman of State's legal office. The main impediment to signing 99-year renewable leases for all 14 available sites has been uncertainty over when some old Bureau of Standards buildings temporarily occupied by UDC will be vacated and demolished, Burman said.

The sites are arranged along International Drive and an offshoot called International Place, on the section of the tract south of Van Ness Street between Connecticut Avenue and Reno Road. These streets will remain under federal, rather than District, owenership so they can be more readily cordoned off for special events and closed to political demonstrations. Federal law prohibits demonstrations within 500 feet of a foreigh mission.

The project's location is about 2 1/2 miles north of the traditional Embassy Row along and near Massachusetts Avenue northwest of Dupont Circle.

It was in this neighborhood, in a cramped townhouse at 1621 21st St. NW that Israel maintained its chancery from 1952 until it moved into the new building last week. One clear benefit is parking. There were only two off-street spaces for the chancery's 100 employes; the new building has 42 in a basement garage. And while public transportation is limited primarily to bus services on Connecticut Avenue, Metro's Red Line subway will open to the nearby Van Ness station late next year.

Israel's decision to locate at the old Bureau of Standards site, remote from the State Department in Foggy Bottom and most existing embassies, was made in 1977 when newly elected Prime Minister Menachem Begin was paying his first visit to Washington. Begin saw the nearly finished structure Nov. 13. when on another Washington visit he conducted the Jewish ritual of attaching the meduza , a religious talisman, to its front door.

Under their arrangements with the United States, foreign nations are charged only enough to pay development costs of the project site, and they must erect the chancery building at their own expense. For Israel, Meir said, the project represented an investment of $5 million.

The only U.S. taxpayers' money in the project is $2.2 million being used as working capital. By law, this must be repaid to the Treasury when all the sites are leased.

Earlier this week, the State Department asked Congress to expand the diplomatic area by adding 12 more acres behind the UDC campus, north of Van Ness Street adjoining Reno Road. This would provide space for nine more chanceries, making an ultimate total of 23.

The measure passed the House easily, but was stalled in the Senate after the November election when the Republicans who will control that chamber next year, put a "hold" on all but the most urgent legislation. Burman, the State Department lawyer, predicts passage next year.