Egyptian President Anwar Sadat, in a wide-ranging defense of his policies, declared yesterday that Saudi Arabia has agreed to pay all the costs of the development of Egypt's armed forces between now[WORD ILLEGIBLE]

Addressing a stormy meeting in Cairo of the Arab Socialist Union --watchdog of Egypt's three political parties -- Sadat also reported new details of his quarrel with the Soviet Union. He said that high level efforts at rapprochement have failed and that Moscow has canceled all military contracts with Cairo.

That the Saudis have contributed several billion dollars to Egypt is well known but a commitment of the kind Sadat described is something new. Sadat gave no details his statement that the Saudis would pay to develop Egyptian armed forces was interpreted by some reporters in Cairo to mean that Saudi Arabia will pay the cost of new weapons Egypt needs.

Saudi support of Egypt is believed to have been a major contributing factor to Sadat's decision early last year to terminate his military part with the Soviet Union and to cancel Moscow's naval base rights. Sadat's close relations with the United States following the 1973 Middle East war were another fundamental factor in his quarrel with Moscow.

On the eve of the Washington visit by Israeli Prime Minister Menachem Begin. Sadat reiterated his view that Israeli occupation of Arab territory taken in the 1967 war must end. It is "inconceivable" that there can be "peace with occupation," he said.

Sadat said Egypt is read to sign an agreement that would "end the state of war politically and legally." He added. "For the first time in its history. Israel's legal existence within its borders will be recognized. This will ultimately lead to one result: namely, that if Israel adheres to the principles of international law, it will become one of the Middle East states that will live in peace."

In the domestic political forum, where he was heckled several times. Sadat did not repeat the statement he made to visiting U.S. congressmen earlier in the week that he would be willing to establish diplomatic and trade relations with Israel five years after a peace agreement. Nor did he repeat his strongly negative remarks, quoted by a Lebanese magazine, suggesting that normal relations with Israel are out of the question for the foreseeable future.

According to news service reports of Sadat's three-hour address, which was broadcast live by Cairo domestic radio, the Egyptian leader said he obtained the commitment from Saudi Arabia last year. "It undertook for the next five years to develop the armed forces without us paying a penny," Sadat said.

Sadat reported for the first time on what happened last month when in an attempt to repair the breach with the Soviet Union. Egyptian Foreign Minister Ismael Fahmi went to Moscow. Sadat said the Soviet Union demanded that be sign a new political agreement or issue a joint statement with Soviet leader Leonid Brezhnev after approval of the text in treaty-like fashion by the Egyptian Parliament.

He said Soviet officials declared that previous contracts to supply arms were wood and that in the future Egypt would have to pay in hard currency even for spare parts. They behaved "rodely and adopted a very hard line," he said.

Sadat said the Soviets demanded that they not be excluded from any future Middle East settlement. He also said the Soviets told him they were backing Ethiopia in the face of a coming attack from Sudan. He said the Soviets were told in response "We are with Sudan and if anything is committed against Sudan, we will enter the battle with all our might."

President Sadat's announcement that Saudi Arabia would finance the development of Egypt's armed forces over the next five years raises several questions. The main one is whether he means the total military budget or just the purchase of new weapons.

In either case, Saudi Arabia has made a multibillion-dollar commitment to keep Sadat afloat.

At least 35 per cent of Egypt's budget goes for military expenditures, ranging from salaries for ordinary soldiers to repayment of billions in hard-currency debt to the Soviet Union. If the Saudis are going to pick that all up, it could mean the salvation of a country in desperate economic trouble.

Another question is what the Saudis got in return. The answer may lie in Sadat's abrupt retreat from his refusal to consider recognition of Israel, or normal trade and commercial relations with Israel, as part of any peace agreement.

After saying no for months, he said last week that establishment of relations might be possible in five years after signing a peace treaty.The switch could be a reflection of Saudi pressure to make concessions in the search for a settlement.

It is possible that merely keeping Sadat in power is enough of a return on investment for the Saudis. With Sadat spearheading resistance to communism in the Red Sea region and the Horn of Africa, the Saudis are eager to keep him in office and to help him put down radical opponents.

The fact that Sadat was beckled during his speech by members of an organization known for its submissiveness may be symptomatic of the malaise that afflicts Egypt, occasionally spilling over into anti-government violence.

The speech should dispel any lingering doubts about the finality of Egypt's split with the Soviet Union and its move into the anti-Communist conservative camp supported by the Saudis.

Thus Sadat finds himself in several positions that would have been unthinkable for an Egyptian leader a few years ago -- bound financially and politically to Saudi Arabia, committed to opposing leftist regimes in Africa and on the defensive against critics at