Former Israeli Foreign Minister Abba Eban formally announced his candidacy for the Labor Party nomination for prime minister yesterday, pitting himself against Defense Minister Shimon Peres and Prime Minister Yitzhak Rabin.

Eban, who is considered an underdog in the three-way race, said he is "realistic" about his chances. The party meeting is scheduled to open Feb. 22 and the national elections are set for May 17.

The Israeli government yesterday presented a $13.6 billion budget with the military outlay down by 6 per cent. The allocation for the military was $4.6 billion, compared to $3.8 billion last year. While the actual figure is up, the percentage cut of the budget is less because of inflation.

In other Middle East developments:

France signed a three-year contract for 292 million barrels of oil with Saudi Arabia, extending a similar three-year contract. French President Valery Giscard d'Estaing is visiting there.

Retired israeli Gen. Mattatyaou Peled said that Paris is an unlikely site for further contacts with Palestine Liberation Organization officials. Peled, an advocate of contacts with the PLO, said he will travel to the United States at the end of this month and would not rule out meetings there. Noting the murder of Palestinian official Mamdouh Saleh in Paris and the subsequent uproar over alleged terrorist mastermind Abu Daoud, Peled said talks must be held "in the greatest secret."

Christians in eastern Beirut went on strike to protest the movement of new columns of Syrian tanks and troops into their sector fo the capital, according to reports reaching Cyprus. There also were reports of clashes between Christian militiamen and Palestinian-Lebanese leftist forces in southern Lebanon.