THE SQUABBLE over whether Prime Minister Menahem Begin and his government did or did not assure President Carter that Israel would establish no new settlements and expand no old ones in the occupied territories is corrosive and distracting and badly needs to be set aside. We are prepared to accept that, on both sides, words were spoken and heard selectively without there being any intent to mislead. The United States and Israel cannot afford to let a mutual misunderstanding disrupt what ought to be a cooperative and trusting approach to Mideast negotiations.

Bur Israelis should not kid themselves about the substance of the dispute. Earlier the Carter administration may not have fully understood the determination or the blindness or the weakness, whatever it was, that led Mr. Begin down the new-settlements track. Now it does. Even Foreign Minister Moshe Dayan now acknowledges, as four successive American administrations have insisted, that the settlements may be illegal. If the settlements are not also obstacles to peace - and President Carter has repeatedly claimed they are - then it is up to Israel to prove so.Fotunately, there are tentative glimmers from Mr. Begin that, at least in respect to the Sinai, he is beginning to understand that the settlements can't remain without end.

No one expects Israel at once to disband the old settlements, in their various locations. But the right of Israeli settlement that Mr. Begin claims in "Judea" and "Samaria" cannot be asserted as though Arabs had no say in it; this question should be out on the table. Creating new settlements now, in the West Bank or elsewhere, is reckless and wrong: an embarassment to Israel's warmest supporters, a provocation to Arabs, a signal to the United States that Israel is not sincere about peace. At least as long as negotiations are on, Israel's policy, whether stated or tacit, should be: now new settlements or expansions of settlements. Period.

The Israelis are in a funk over President Anwar Sadat's visit to Washington. They don't see, or won't, that it was their own aberration that provided the Egyptian leader with his main opportunity to come on as, in Mr. Carter's farewell words to him, "the world's foremost peacemaker." They are now heaping up every real and imagined expression of American partiality for Egypt and coming to the embattled conclusion that they must instantly launch a deplomatic and public-relations counteroffensive. Already a struggle is being organized against the prospective sale of F-5Es to Egypt, though everyone knows that a deal of certain dimensions is a sure thing and, from Israel's standpoint, not really a bad thing, either.

In fact, the real need is not for a propaganda blitz but for a spell of serious negotiation. the immediate focus must be on the American effort to win agreement on a set of "principles" that could lead to resumption of Egyptian-Israeli political talks. This will require some difficult rethinking by Israel, but there is a promising reward: the prospect of drawing Jordan and Palestinian moderates into talks and of thereby making it possible for Egypt to go ahead and write a peace treaty with Israel. The opening offer Israel has made on Sinai withdrawal and Palestinian "self-rule" could then receive the appreciation it deserves and could become a basis for further negotiations. We cannot believe Israelis would put all this in jeopardy for the sake of a handful of settlements.