Saudi Arabia has decided to end its unique two-capitals system in which foreign diplomatic missions are separated from the royal capital and seat of government by 500 miles.

All foreign embassies in the kingdom and the Ministry of Foreign Affairs are here in the Red Sea port city of Jeddah. Virtually all other government agencies have their headquarters in the royal family's booming desert capital of Riyadh, more than an hour away by commercial airliner.

Now Riyadh is to become the country's single capital.

The old system, diplomats say, suited the country's purposes in the early years after the founding of the modern Saudi kingdom in 1932.

Most foreign missions here at that time were from Moslem countries and their chief business was protecting the interests of their people who make the pilgrimage to Mecca, for which Jeddah is the port of entry. Riydah, hardly more than an oasis village, was deliberately kept isolated from foreign influences by the deeply conservative royal house of Saud.

But times are changing in Saudi Arabia nearly as fast as the oil money is pouring in. With the country awarding billions of dollars in development contracts to foreign firms each year and also evolving into an important Middle East political power, the two-capitals system has become a major inconvenience.

For many businessmen, government officials and diplomats, working life has become a series of commutes on the "Arabian Express." Saudi Arabian airlines' equivalent of the Washington-New York shuttle.

But last year the government announced that foreign embassies, and the Saudi Foreign Ministry, were to move to Riyadh within five years.

Saudi officials say the decision to move the embassies to Riyadh is an administrative move with no political significance.

Experienced foreign observers, however, say it reflects a breakdown of the traditional secretiveness and isolation of the Saudi rulers and shows that they are overcoming their reluctance to have the activities of the royal family scrutinized by foreigners.