A French court rejected demands today from West Germany and Israel that suspected Black September leader Abu Dauod be held for extradition hearings. It freed the Palestinian guerilla.

Accused by Israel of masterminding the terror attack on the Israeli team at the Munich Olympics in 1972, Abu Daoud was immediately expelled from France by the government.He flew to Algiers this afternoon.

The sudden and hastily arranged ending to Abu Daoud's imprisonment, which began Friday after French counterspionage agents picked him up at a Paris hotel, embroiled President Valery Giscard d'Estaing's government in international controvery.

Israel recalled its ambassdor to Paris for consultation and Foreign Minister Yigal Allon angrily told the Israeli Parliament that France had failed "the international test of courage and integrity accused France of being pro-Arab.

"We are outraged," U.S. Secretary of State Henry A. Kissinger told a Washington Post special correspondent in New York)

West Germany expressed its regret, but privately officials appeared relieved that France had disposed of the case on its own. The still-murky circumstances surrounding the arrest, apparently without the knowledge of higher French officials, of a Palestinian leader who had been officially received at the Foreign Ministry here one day before, also threatened to add to Giscard's domestic problems.

His chief political lieutenant and interior minister, Michel Poniatowski, already under fire here for his maladroit handling of a recent murder scandal, at first gave out conflicting versions of why the arrest was made and then retreated into silence as the government's embarrassment and Arab criticism of the move grew.

Abu Daoud,39, is a Palestinian terror leader whose real name is Mohammed Daoud Audeh and who was traveling on an Iraqi passport issued under the name of Yussef Raji Hanna. He was whisked from prison this morning ot a custody hearing in an appeal court that had not been scheduled to meet until next Monday.

In court, the state prosecutor joined defense lawyers in telling the examing magistrate that there was no supporting evidence to justify continuing to hold the Atab prisoner, who insisted throughout the hearing that he as an Iraqi named Raji.

"I am here on an official mission." Abu Daoud, who accompanied a Palestinian Liberation Organizaton delegation to a meeting at the French Foreign Ministry on Thursday, told the court. "I had reason to believe that I enjoyed immunity during my mission." The delegation attended the funeral here of a murdered Palestinian militant on Saturday.

The presiding judge rejected on broad legal grounds the Israeli request that Abu Daoud be detained for 60 days until a formal extradition hearing could be held. He noted that Munich attack, in which 11 Israeli athletes died, occurred in September 1972, while the law under which Israel would have to prosecute the Palestinian was not passed until 1975.

The dismissal of the West German arrest warrant, however, had to be pinned on a technicality that left the clear impression here that the French had made a political decision to get rid of their embrassing prisoner as quickly as possible and then brazen out international reaction.

The state attorney joined the defense lawyers in pointing out that West Germany had not forwarded other documents or evidence to support the single arrest warrant issued Saturday - after the French had informed the West Germans of the arrest.

The defense also stressed that West German officials had publicly said they had not asked for Abu Daoud's arrest through Interpol, as the French Interior Ministry originally claimed.

This left only and unsupported arrest warrant against Mohammad Audeh, alias Abu Daoud, alias Jordanian citizen Raji Yussef Hanna. The court noted that the man standing before it claimed to be an Iraqi citizen named Yussef Raji Hanna.

Abu Daoud was freed and taken under heavy police guard to Orly airport where he was given a first-class seat on an Air Algeria flight to Algiers where he arrived tonight.

West German officials claimed in Bonn that under the law they had three weeks within which to provide supporting evidence for the arrest warrant and criticized the French decision. A senior member of the opposition Christian Social Union, the dominant conservative political party in Bavaria, said the decision by the French would have "catastrophic" consequences.

Washington Post correspondent Michael Getler reported from Bonn, however, that officials were privately relieved that they would not face the dilemma of having on their hands a prisoner who might trigger new terror raids demanding his release.

Poniatowski's ministry was still trying to explain today why the counterespionage agency known as the DST had arrested Abu Daoud in the first place.

Three reasons offered so far for the arrest include an Interpol warrant, then a false passport charge and finally a telephone request from West German police. The DST, however, has close links with the Israeli intelligence service, the Mossad, and remains chagrined over the murder of two of its agents in 1975 by the pro-Palestinian terrorist known as Carlos. This has sparked the suspicion that DST agents acted on their own and, knowingly or otherwise, plunged Giscard's government into a new embarrassment.