The U.S. refusal to allow Israel to sell its Kfir jet fighter planes to Ecuador has become an election campaign issue here and the bilateral issue causing the most firction between Israel and the United States.

Israeli Prime Minister Yitzhak Rabin went to the United States with a possible compromise suggestion in mind, according to industry sources here. He discussed the matter with President Jimmy Carter in their talks in Washington.

Under the reported compromise, the Kfir would be sold to Ecquador with certain weapons systems removed to make the plane less sophisticated, thereby saving the Carter administration's principles and at the same time saving the deal for Israel.

Ecuador is reportedly willing to accept such a compromise, although this has not been confirmed.

The Kfir jet, which has a General Electric engine and other American components, cannot be sold to another country without permission fron the U.S. State Department. Permission was refused by the Carter administration because U.S. policy opposes the introduction of sophisticated war planes in South America.

Despite the reported compromise, Foreign Minister Yigal Allon said Friday that the chances of persuading the United States to change its stand on the Kfir sale were practically nil.

About a thousand workers of Israel Aircraft Indutries, makers of the Kfir, demonstrated in front of the U.S. embassy in Tel Aviv yesterday. They carried placards saying "No American handouts but industrial development" and "No Kfir, nor work, no bread."

A union leader promised the demonstrators that unless Rabin returned from Washington with "good news" the next demonstrations would be against the Israeli government. Rabin's ruling Labor Party is facing a general election May 17.

Israel believes it cannot build up a modern arms industry of its own unless it can export. The sale of aircraft to its own armed forces - albeit considerable - would never be enough to support an industry that employs some 20,000 workers and accounts for a sizeable chunk of the economy.

Israelis also would like to have a modern arms industry to their own to lessen dependence, both political and military, on the United States.

Although U.S. Secretary of State Cyrus R. Vance said during his recent visit here that the ban on selling Kfirs to South America need not necessarily mean that Israel cannot sell the planes elsewhere, the Israelis fear that without South America their industry may be crippled. The Eucador deal would have brought in $150 million and an industry spokesman recently said that Israel had been negotiating with two other SoutH American countries. He would not name the countries.

Although there is talk here of selling Kfirs to Austria and perhaps to Taiwan, South America represents the biggest single area of potential sales open to the Israelis. Israel has been selling arms to South Africa but they realize there is no hope of getting U.S. permission to sell Kfirs to Pretoria.

Since the Soviets have sold sophisticated fighters to Peru, and since the Equadorians are likely to buy either French or Soviet planes if they cannot buy the Kfir, the Israelis argue that the U.S. policy is ineffective.

After Vance told the Israelis that there is virtually no chance of the administration approving the Ecuador deal, the head of Israel Aircraft Industrite, Adolf Schwimmer, flew to Quito and persuaded the Ecuadorians to wait until March 15 before shopping elsewhere. He reportedly talked to the Ecuadorians about accepting a somewhat lesser weapon if the United States would approve the sale.