Hundreds of Israelis, led by relatives of the 11 athetes slain at the Munich Olympics, threw eggs and tomatoes at the French embassy here today and shouted insults in an emotional demonstration protesting France's release of a Palestinian terroist accused of masterminding the 1972 massacre.

The sudden release of Abu Daoud by French authorities yesterday in the face of requests by Israel and West Germany for his extradition drew sharp criticism from newspapers throughout Western Europe. But in the Soviet Union it drew praise.

The U.S. State Department said it has formally expressed to France its "dismay" over Daoud's release and President-elect Jimmy Carter said he was "deeply disturbed and very much surprised that this man was released."

Several hundred protesters broke through police lines at the French embassy here, shouting coarse epithets directed at French President Valery Giscard d'Estaing and demanding the explusion of French Ambassador Jean Herly, who had been summond to the Israeli Foreign Ministry to receive a blistering protest.

Tomatoes and eggs splattered against the cream-colored walls of the embassy. One of the eggs splashed against the French flag in front of the building.

"Giscard Nazi" and "Giscard Assassin" were chanted by demonstrators. Others, many of them visiting American youths, shouted obscenities in English.

Widows of athletes who died in Munich stood in front of the embassy, holding hands with their children, who had photographs for their dead fathers around their necks.

A 10-year-old boy waved a placard that said, "Giscard: Daoud killed my father."

Ilana Romano, widow of a weightlifter slain in Munich said the French government had "sold blood for oil."

"We don't need the French embassy here," she said. "What business does it have here?"

Anka Spitzer, widow of fencer Andre Spitzer, demanded that Ambassador Herly "go back to France where he belongs, among the cowards and traitors."

The families of the slain athletes were to meet Thursday with Foreign Ministry Yigal Allon. They said they would insist that the French ambassador be expelled.

Henry who was at the Foreign Ministry in Jerusalem when the demonstration took place, was told by Ephraim Evron, the ministry's deputy director-general that France had committed "a hostile act" against Israel that lent support to "murderous terrorism."

Israel's ambassador to France, Mordechai Gait, left Paris for Jerusalem today, recalled by Israel. He said his departure was Israel's "solemn protest" against the France move.

The French government defended the decision, reiterating its official explanation that it had no other choice because it found no legall basis for Daoud's arrest or extradition.

Asked by reporters about the foreign criticism of France, Interior Ministry Michel Poniatowski said: "France refrains from giving lessons. In return she expects not to believe any."

A leader of France's Soialist opposition and the French press, including Le Figaro, which generally supports the government, denounced the release of Daoud.

Gaston Deferre, mayor of Marseilles and deputy leader of the Socialist Party, accused the government of "cowardice."

LeFigaro said, "It's incomprehensible to us, when the police did their duty and detained a man whose job is to organize hijackings, commando raids and execution of hostages ... and the government washes its hands of the affair. It's sheer comedy."

The Daily Mail of London called the decision "comtemptible" and the Daily Telegraph said it appeared to have been "whooly dictated by expediency."

The Soviet government newspaper Izvesita, however, applauded the French action, saying any criticism of it was "primarily aimed at spoiling the good relations that now exist between France and the Arab states."

In Bonn, the West German Cabinet discussed the affair but spokesmen added nothing to yesterday's official statement of regret that Daoud had been freed.

Carter discussed it with reporters during a break in a Washington conference with his foreign policy team and senior members of Congress. "I suppose the only thing to be done now is to express concern in the world community," he said.

State Department spokesman Robert L. Funsetn said that, although the United States had formally expressed its dismay to the French government, "We have very close ties with the French government and cooperate with the French government on a broad range of issues and will continue to do so."

Several members of Congress, including Rep. Joshua Eilbert (D-Pa.) and Sen. Abraham A. Ribicoff (D-Conn.) urged President Ford to recall the U.S. ambasador to France as a protest.

Daoud, in a press conference today in Algiers, where he flew yesterday after leaving France, blamed his arrest on "Zionist" influences within "certain elements of the French police services."

He said there were conflicts between the Zionists and the "official French position regarding the rights of the Palestinian people" and added that the Palestine Liberation Organization "hopes this dualism will cease."

Meanwhile, a French court ordered the release of a Iranian student accused of trying to assassinate an Iranian diplomat in Paris in November. Although the diplomat who was wounded in the attack, had identified the student, the court ruled that newspaper photographs may have influenced the diplomat in making the identification.