The small party that is the key to a coalition government with the rightist Likud Party reacted coolly today to Likud's efforts to bridge the two parties' differences over the West Bank.

Their disagreement over whether to return part of the occupied territory to Arabs is the major obstacle to a coalition.

In the first negotiating session between Likud and the Democratic Movement for Change yesterday, Likud offered a compromise under which both parties would agree to hold a referendum before any change ismade in the status of the West Bank.

But, in the words of a newly elected member of Parliament for the Democratic Movement, Shmuel Toledan. "If you do not do anything toward peace it will never get to a referendum."

The Democratic Movement wants a greater commitment on talking positive steps toward peace rather than negative guarantees that the situation will not move backward.

The smaller party is also worried about the expansion of what have been considered illegal Jewish settlements on the West Bank. Likud's leader, Menachem Begin, said right after the election that there would be more Jewish settlements in areas that have traditionally been considered out-of-bounds. "Likud says this would be decided by the government but we know that we would be in the minority if we joined the government," Toledano said.

Meanwhile, Begin's doctors announced today that he is suffering from an inflamation of the membrance around the heart - an easy malady to treat and not all dangerous, the doctors said. Begin was hospitalized Monday. The doctors said today that Begin would be able to take up the full workload of the prime minister's office.

The independent newspaper Haaretz said in an editorial this morning that the Democratic Movement "cannot be satisfied with a formula that leaves the field open to the Gush Emunim [the extremist faction of the National Religious Party], which may simply not ask for permission before taking action." Gush Emunim believes in settling Jews in the West Bank to force outright annexation.

Yesterday its leader, Hannan Porat, said, "This is our opportunity. The mission of Gush Emunim is now to grab and settle. In the next six months we must set up 20 new settlements in Judea and Samaria."

The Movement's dilemma - to join a coalition or not - was succinctly put in a Jerusalem Post editorial today.

"Nowhere is the cooling hand of the DMC needed more than on the fevered brow of the Likud's proposed foreign policy, as hinted at in Mr. Begin's first pronunciamentos since winning the election. But if the DMC's influence cannot be assured in real political terms, the new party would do well to stay out."

[The Isreali military command accused Egypt Wednesday of violating the interim Sinai agreement by moving extra troops and shoulder-fired SA-7 missiles onto the east bank of the Suez Canal. The command demanded "removal of the forbidden Egyptian forces and weapons."]