PRIME MINISTER Yitzhak Rabin's retirement from Israeli politics on account of his and his wife's mishandling of a personal Washington bank account is a sad turn. Mr. Rabin had served his country with distinction as a soldier, diplomat and political leader and, barely a month go, had won his party's mandate to lead it into elections a month hence. His victory was probably, and thus the Israeli people, facing an extremely difficult passage, have presumably been deprived of the man they most wanted to lead them through it. It is some consolation, of the sort that one gulps in acknowledging, that the vigor of Israeli democracy had been validated with a vengeance.

For whatever impropriety or illegality Mr. or Mrs. Rabin may have committed, they will conduct their own defense. We note, however, that through we have had our differences on policy with Mr. Rabin, we never doubted the seriousness and integrity of his approach to his public duties.To suggest, for instance, as a cartoon on this page today suggests, that his misfortune is somehow just retribution for his diplomatically indiscreet intervention in support of Richard Nixon's re-election in 1972 is, we believe, unfair.

Defense Minister Shimon Peres is the leading candidate to receive the Labor Party's bid, in its conference today, to head its election ticket. He had almost edged Mr. Rabin out in February. Mr. Peres is the consummate insider. He has served in high party and government posts for more than 20 years and thus has both the savvy and the sound of a stuck needle that come from being part of an established political machine. From his defense orientation and from certain political stands, he has gotten a reputation for being a hardliner in dealing with the Arabs. But we would caution against pre-judgment. Politically, he is close to such Labor Party foreign-policy moderates as Abba Eban. It is conceivable that, just as it took an Eisenhower to make peace in Korea, a de Gaulle to settle the Algerian War and a Nixon to go to Peking, so a politican of Mr. Peres' credentials might be able to make moves toward a Mideast settlement that other Israeli leaders could not make.

But his is running too far ahead. The more dismal current reality is that the multiplicity and fragmentation of parties in the Israeli political system virtually ensure a weak government. The Labor Party, itself far from a monolith, was already in such disarray after 29 years of uninterrupted power that it was given little chance of even coming near forming a majority on its own. The personality of the prime minister may be less important than the frailty of the prime ministership. From the point of view of diplomacy, this is bad news. To make the difficult decisions that the American-led search for a Mideast settlement will require, Israel needs a strong leader. Whether it will have one was a question while Mr. Rabin was running, and it is an even bigger question now.