Fierce fighting raged today between rival forces battling for control of villages in southern Lebanon, with Palestinian sources saying Israeli warplanes intensified flight over the combat zone.

By this morning, at least 40 people were reported killed and 100 wounded in the latest round of ground fighting and artillery duels. Medical sources in the southern port of Sidon said many of the casualities were civilians.

Both sides - the Palestinian-leftist alliance and the Israeli-backed, predominantly Christian rightist forces - seemed to be preparing for fighting on an even larger scale, according to travelers from the area, who reported seeing truckloads of Palestinian militiamen leaving Sidon and heading south.

Rightists and Israelis were reported by the Palestinian sources to be assembling armored vehicles on the road between rightist-held Kleya and the plain around Khiam.

In Tel Aviv, military sources said Israeli forces along the southern Lebanese border have been put on a special state of preparedness following the intensified fighting.

They said no Israeli reinforcements were sent to the sensitive areas, but troops have been instructed to keep a close watch on developments. The recent surge fighting has jeopardized U.S. efforts to bring peace to the Middle east and has brought a set-back to Lebanon's reunification plans.

The travelers said shelling of the leftist-held Nabatiyeh region today caused heavy damage to buildings, and rightist said they captured several communities in the region, close to the Israeli border.

But the Palestinians reported that their forces beat back attackers sweeping down on Khiam from a hill-top strongpoint they seized two days ago. The Palestinian news agency WAFA said the rightists attacked Khiam twice with tanks under the cover of heavy artillery fire and lost one tank in being thrown back.

In other developments in the Middle East:

The Palestine Liberation Organization's Central Council, with Yasser Arafat present, met in Damascus to discuss recent developments in the Middle East.

Egyptian Foreign Minister Ismail Fahmi, traveling to the United States, continued a visit in Paris where he is expected to meet with Foreign Minister Louis de Guiringaud Tuesday.

An Israeli soldier was knifed in a street in Israel-occupied Gaza City, and Israeli military sources said the he then fired on his attackers, killing him and an Arab bystander. The attacker had a history of mental illness, the military sources said.

"The new assembly will not be an easy one," he warned.