THE ISRAELI GOVERNMENT'S decision to legalize three previously illegal settlements on the West Bank is more than "deeply disappointing," as the State Department declared. It is reckless, provocative and indefensible. It amounts to a frontal assault on the American effort to arrange a settlement by inducing Israel to exchange war-won territory and a place for the Palestinians, for contractual acceptance by its Arab neighbors. Coming on the heels of Prime Minister Begin's warm reception in Washington, the decision conveys the unmistakable aura of sticking a thumb in Jimmy Carter's eye.

Mr. Begin's view that the West Bank is "liberated" territory, Israel's by holy scripture, and not occupied territory, is well known. It is also wholly unrealistic and incompatiable with any serious effort to work out a lasting settlement in the Middle East. For the purposes of American diplomacy, it cannot be controlling. It is Mr. Begin's problem, religious and political, to solve as best he can. Last week in Washington he chose to muffle disagreements with the United States on this substantive issue and others. Mr. Carter did not press him, at least publicly. To the extent that Mr. Begin chose to mistake the President's discretion for consent, or weakness, that was a mistake. Legalization of three West Bank settlements and loud Israeli demands to plant more pose a challenge the Carter administration can no longer ignore.

Edward Sheedan, in an article on the opposite page today, suggests that Mr. Begin may wish to absorb the West Bank and, if the Arabs overly protest, to wage preemptive war. We do not subscribe to this scenario but is seems to us undeniable that the latest Israeli move adds plausibility to it. Certainly it puts the whole credibility of the administration's Mideast diplomacy on the line.

President Carter has been, we believe, amply attentive to Israel's legitimate security needs. He has offered Israel generous and effective alternatives to the permanent retention of territory. These include arms guarantees, interim security borders beyond the political borders, limitations on a Palestinian "homeland," relations of a new sort with its neighbors and, of course, American friendship and commitment. So the United States does not have to apologize to Israel for asking it, in a negotiated peace put into effect over a period of years, to withdraw to something reasonably close to the 1967 lines.

Now that the Israelis have forced the issue, we are led to conclude that it is a good and necessary one to fight out with them. The time is right: It is early in both the Carter and Begin administrations and if either is serious about peace, this issue has to be resolved. Good feeling of the superificial and misleading sort achieved by Mr. Begin here last week is not merely worthless. It becomes positively perilous if it encourages Israel to proceed in ways that could fatally foreclose all hope for a comprehensive Arab-Israeli settlement.