A key left-of-center political faction abruptly broke off negotiations on a coalition with the Likud Party today because of the party's selection of Moshe Dayan as foreign minister in a new government.

The Democratic Movement for Change, with which the rightist Likud had been negotiating to form a broad coalition government, said after a meeting tonight that it was suspending all negotiations until the "clock is turned back" and the Dayan appointment rescinded.

The announcement yesterday that Dayan, defense minister in Israel's 1967 war with the Arabs and a controversial political figure since then, had been given the post in a Likud-led coalition government caused shock, anger and applause.

Colorful, moody and unpredictable, Dayan is one of the best known Israelis overseas. Likud's Ezer Weizman, who will probably be Israel's next defense minister, said today that his party picked Dayan "first of all because he believes in our way of thinking concerning how negotiations should be carried out with the Arabs and then for his stature in the world."

Yigael Yadin, head of the Democratic Movement, a new party that finished third, after Likud and the longdominant Labor Party, in last week's parliamentary election, said earlier today that Dayan's appointment presented "a new situation" in efforts to form a government.

Interviewed on Israeli Radio before the Democratic Movement suspended the talks, Yadin questioned whether the filling of such an important position as foreign minister should have been done unilaterally while coalition negotiations were under way. He said the appointment raised questions as to "what sort of role and influence we may have in the next government concerning foreign affairs and security."

Dayan's views on foreign policy are closer to the Likud Party's than to those of his own Labor Alignment, the party that was handily defeated by Likud. Dayan agrees with Likud that Israel should not, at least for the foreseable future, give up territory on the occupied West Bank of the Jordan River. Yet, unlike some Likud members, he is opposed to annexation of the West Bank and would prefer to leave it in politiccal limbo.

Despite his popularity among many of Israel's supporters abroad, his stature at home is somewhat diminished and there are many Israelis who still blame the former defense minister for Israel's early reverses in the October 1973 war.

Former Secretary of State Henry Kissinger found Dayan the most creative of Israel's leaders and Dayan is generally credited with having devised the formula that led to the interim agreements with Egypt in the Sinai.

Leaders of the right-wing National Religious Party, which is sure to be an ally of Likud in any coalition, applauded the choice of Dayan as foreign minister.

The most severe criticism came from the Labor Party's ranks. Yisrael Kargman, chairman of the finance committee of parliament, called Dayan's defection from Labor "political prostitution."

A likud leader, on the other hand, said that "crossing the floor is not unusual in parliamentary life. Churchill did it twice."

Such an abrupt switch is, however, unusual in Israel and it is viewed here as a manifestation of Dayan's contempt for political convention. It is known that Dayan had several flirtations with Likud before the elections but in the end decided to say on Labor's slate where he won a seat in the next Parliament.

It has been reported in the Israeli press that Dayan asked for and received assurances from Likud Party leader Menachem Begin that Likud would agree to hold a referendum before it made any move toward annexation of the West Bank. If true, it would mirror the pledge that Dayan demanded and received from Labor that a Labor government would not give away territory on the West Bank without first seeking public approval in new elections.

Dayan, in a telephone interview today, would neither confirm nor deny the report and said only that he and Begin "discussed policy for the West Bank and I can live with Mr. Begin's policies without violating my own principles."

Dayan said that since Begin had not yet formed a government, the "technicalities," such as whether he would leave the Labor Party or give up his parliamentary seat, would be decided later.

The Labor Party feels that Dayan is under a moral obligation to give up his seat. Under Israeli law, the prime minister is the only Cabinet member who has be a member of Parliament.

An extra seat could prove very important to Likud, however, as it would increase its plurality and strengthen its hand in negotiations with other parties.

Although the Democratic Movement for change had received similar assurances that Likud would not annex the West Bank without a referundum, its doves fear that a Likud government would take such a hard line in negotiations that progress toward peace might prove impossible.

Dayan's appointment will not reassure this faction. Elements were prominent among those demanding Dayan's resignation as defense minister after the 1973 war.

Rumors abound that Begin, who suffered a heart attack before the election, is bringing Dayan in as his heir because he does not think anyone in his own party has the stature to be prime minister should his own health fail.

Others insist that Begin was trying to form as broad-based a government as he could and, if Labor was going to refuse to join a government of nationalunity, he felt free to woo as many Laborities away as he could.