The Israeli government today formally turned down Egyptian President Anwar Sadat's proposal that a working group be formed to prepare for a Geneva conference.

Cabinet spokesman Aryeh Noar said Israel saw nothing to be gained by creating new institutions that would only complicate matters and could create new obstacles to peace.

He said Israel wanted the Arabs to accept or modify the American proposal for a Geneva conference. If they reject it, he said, the onus for not going to Geneva will be on them.

Referring to Sadat, Noar said, "Let him say he does not want a Geneva conference."

The vote to reject Sadat's proposal was taken at the suggestion of Foreign Minister Moshe Dayan.

It is understood that the Sadat proposal was not transmitted to Israel through the United States and that the Cabinet was basing its decision simply on press reports of what Sadat had said.

It would appear, therefore, that Israel is anxious to shoot down Cairo's trial balloon before it can gain altitude. Israel recognizes that Egypt is in a tight spot vis-a-vis the American-backed working paper for a peace conference and its Arab allies.But Israel does not want to let Egypt out of the corner.

Israel believes that it has made serious concessions in the working paper negotiated by Dayan and U.S. Secretary of State Cyrus Vance, such as agreeing to a joint Arab delegation including Palestinans at the conference.

The proposed working group to prepare for the Geneva meeting is interpreted here as an attempt to set up a body that would in effect take the place of a Geneva conference. Spokesman Noar said that the Egyptian proposal was not the same proposal Sadat made in August, which Israel accepted. The original proposal, as interpreted by Israel, was that there should be bilateral working groups to discuss Geneva issues, not a joint Arab delegation to prepare for Geneva.

Washington Post Correspondent Thomas W. Lippman reported from Cairo yesterday that Sadat apparently believes that a full-scale Geneva conference cannot be held this year. Sadat's proposal is seen in Cairo as an effort to hold some kind of peace talks, despite the chilly Arab reaction to the Dayan-Vance working paper.

The Israeli Cabinet also decided to remain in the International Labor Organization, from which the United States withdrew last week, partly because of the U.N. agency's treatment of Israel.