A federal magistrate ruled yesterday that a grand jury could hear allegations that a 21-year-old Saudi Arabian sheik allegedly offered to sell a stolen $1.2 million emerald-and-diamond ring to an undercover FBI agent.

U.S. Magistrate Jean F. Dwyer said after a hearing yesterday that the government had shown there was probable cause for a grand jury to consider the evidence in the case against Sheik Allal al-Fassi, whose in-laws are members of the Saudi royal family.

Al-Fassi, who does not have diplomatic immunity, has been charged with interstate and international transportation of stolen goods, a felony punishable by a maximum of 10 years in prison and a $10,000 fine. His lawyer, former Watergate prosecutor Richard Ben-Veniste, said al-Fassi has pleaded not guilty to the charge.

The gold ring, set with a 22.7-carat square emerald and 21 round diamonds, belonged to Harry Winston Inc., a jewelry firm in New York. It was reported missing just after it and some 200 other items were displayed in Miami last May at a private showing at the home of Prince Turki Bin Abdul Aziz, who is married to al-Fassi's sister, FBI agent Michael R. Hartman testified yesterday. Hartman said al-Fassi was present at the showing.

Hartman told Dwyer he was posing as a prospective buyer last month when he met al-Fassi at the Washington Hilton Hotel. Hartman said al-Fassi, who said he had purchased the ring in London for about $500,000, offered to sell the ring for $350,000. The young sheik was arrested at the hotel.

Ben-Veniste told Dwyer the government's case was "entirely circumstantial" and that there was insufficient evidence that al-Fassi actually knew the ring was stolen when he tried to sell it.

Dwyer allowed al-Fassi to remain free on a $25,000 bond but turned down a request that he be allowed to leave the country while the grand jury considers the case. The grand jury now has 30 days to return an indictment or dismiss the case.