The Islamic Saudi Academy, a private school financed by the Saudi government, will lease the closed Dunn Loring Elementary School for two years under an agreement approved by the Fairfax County School Board early yesterday.

The school, which has 250 students in preschool through grade six, will rent the building through 1988 under a lease that is likely to require the Saudis to make $600,000 worth of improvements, school officials said.

The board's approval followed testimony by G. Ray Worley, president of the Dunn Loring Improvement Association, a civic group, that neighbors did not object to the lease as long as the community could use the school after hours and the lease did not create much traffic.

The Dunn Loring school, at 2334 Gallows Rd., was closed in 1978. Long-range plans call for it to be used for School Board administrative offices and a center for emotionally disturbed children.

The Saudi academy is located on Popes Head Road in Fairfax, on land purchased from the Fairfax Christian School three years ago. Larry Becker, a lawyer for the academy, said the additional space is needed because the school has a long waiting list and zoning restrictions do not allow it to expand at its current site.