Saudi Arabia's Crown Prince Fahd has killed a sales deal that would have brought a Saudi middleman commissions totaling more than $100 million out of a $7 billion contract for telephone service in the kingdom.

The Saudi agent who lost what rivals were calling "the commission of the century" because of Fahd's decision is Prince Mohammed bin Fahd - the son of the crown prince.

Fahd's action is depicted by Arab and European sources as one of the first serious moves by the Saudis to curb the frenetic government spending and exorbitant payoffs to local agents by foreign firms that have accompanied Saudi Arabia's amassing of enormous wealth for its oil exports.

"It must have been a painful moment for Fahd, but he wanted to set the example that would show that the time of wild spending had to come to an end," said one business source close the negotiations between Philips, the giant Dutch conglomerate, and the Saudis for the installation of a nationwide automatic telephone system.

If it had been granted, the Philips contract would have been perhaps the largest single commercial deal yet to be made in the newly wealthy Middle East oil-producing lands. The Philips estimate was $6 billion over the Saudis own projection.

Sales commissions have been a sensitive issue in Saudi Arabia since staff investigations for the U.S. Senate and the Security Exchange Commission produced admissions from American companies that they paid some Saudi middlemen exorbitant commissions which in a number of cases were intended as bribes to high officials for getting contracts.

Neither Prince Fahd nor his son was named in those investigations. The crown prince, who is also prime minister, has reportedly been concerned, however, about the image being given the country by highly placed princes receiving large commissions from foreign firms.

Fahd's role in killing the Philips deal and his son's commission is also an important sign of his determination to change his own image as he moves closer to the throne. Once known as a playboy, he dropped $6 million at a Monte Carlo gambling casino in one night three years ago. He has given up all gambling and other pastimes that might draw criticism in the rigidly Islamic Society of Saudi Arabia since King Faisal was assassinated in 1975 and Fahd became crown prince to King Khalid.

Fahd's decision to break off exclusive negotiations with Philips after technical experts told him that Saudi Arabia should spend no more than $1.2 billion on the telephone system has opened the race for a scaled down but still lucrative contract to other companies.

International Telephone and Telegraph, the American multinational, is one of an estimated 11 companies being asked by the Saudis to submit bids for the work, which centers on installing of the most technologically advanced automatic exchanges and increasing the number of telephones from 200,000 to 700,000.

The American embassy has quietly but strongly lobbied the Saudis to give a major share of the contract to an American company, according to Arab sources.

Spokesman for ITT and Phillips, which has also been invited by the Saudis to submit a new cost estimate for the system, said that the Saudis had not yet formally called for bids but would probably do so within a month.

Details of the cancellation, which was decided on in February when Fahd chaired a meeting of the Council of Ministers in the absence of King Khalid, who has been in London or surgery, are only now beginning to filter through the business community in Europe.

The proposal that Philips produced during a year of negotiations went far beyond the telephones and exchanges that were to be installed. Philips offered a package that included the building of 1,000 dwellings for its staff in Saudi Arabia and five-year maintenance of the system, informed sources report.

Even the commission on the sub-contract for the locks on the doors of the staff housing would have made me a wealthy man," one Arab sales agent said to a friend after the Philips proposals was rejected.

Philips spokesmen confirmed Friday that Continental Telephone, an American company based in Atlanta, was to have carried out a major part of the job on subcontract from Phillips. The spokesmen refused to confirm or deny the overall price that had been suggested, the total of commissions due agents or that Prince Mohammed bin Fahd had represented Philips.

Two months ago sales agents in Saudi Arabia felt that Philips had the enormous contract wrapped up after a year of noncompetitive negotiations. The Saudis have been spending on a lavish scale on infrastructure, and gladly paying the highest premiums for speed sand quality.

The resulting inflation rate, which has gyrated between 20 to 30 per cent, has begun to concern the country's rulers, however, Fahd reportedly has passed the word that contracts are to be carefully scrutinized budgetary controls established and observed, and expenditure stretched out even if it means falling behind on project timetables.

The Saudi minister of post telephone and telegraph, Alawi Kayyal, told Arab reporters three weeks ago that Philips had asked 24 billion Saudi riyals ($7.2 billion) for the contract, while the ministry's estimate for work had been one-sixth that figure.

Unable to reconcile the huge discrepancy, the ministry suggested that the Philips offer be rejected, and Fahd accepted that recommendation in the Council of Ministers.