Despite the appearance of a bare minimum of concessions, Israeli Prime Minister Menahem Begin has in fact modified a lifetime of prejudicial thinking on relations with the Arabs - a development forecast by a confidential State Department memorandum six weeks ago.

The memo, drafted for Secretary of State Cyrus Vance before peace talks between Egypt and Israel, traced an evolution in Begin's political thinking that was inconceivable before his election as Israeli prime minister last spring. Written by Mideast experts in the State Department's intelligence branch, the analysis accurately foresaw what even hard-nosed realists in the administration now concede.

Thus, the private sour reaction here to Begin's self-invited visit is sweetening considerably. For the first time since Egyptian President Anwar Sadat's pilgrimage to Jerusalem Nov. 19, the Carter administration's highest officials now see a real chance for an Israeli-Egyptian peace - and a separate settlement for the 1 million Arabs on the West Bank and Gaza.

The intelligence analysis for Vance predicted Begin would move by stages toward the long-held position of Begin's foreign minister, Moshe Dayan. The Dayan plan encompasses limited autonomy - self government without military or foreign-policy powers - for Palestinian Arabs, vaguely tied to Jordan but with commercial links to Israel.

In the privacy of President Carter's White House office, Begin took the "Mr. Flexible" role played by Dayan in past Labor governments. The prime minister outlined a concept of "autonomy" calling for a regional legislature. But the Israeli army would hold positions throughout the West Bank.

"Begin, the zealot who would never move a millimeters," has moved several millimeters," a diplomat here told us. "In fact, he has already offered the West Bank more autonomous power over their own affairs than the Hashemite kingdom of Hussein ever offered during 20 years of control of the West Bank."

Begin's millimeters of movement are merely the starting point. He cannot withdraw from them, no matter how Sadat reacts. Rather, the extremely cautious concessions Begin has made - which are not even close to Sadat's demands for West Bank statehood with full sovereignty - must be slowly built upon if the peace momentum is to continue.

Assessments within both the State Department and, to a lesser extent, the National Security Council staff see this starting to happen when Sadat and Begin meet in Egypt on Christmas Day. Begin's popularity, these analysts feel, is still waxing inside Israel, and he is now irrevocably committed to a pro-peace line, which implies the inevitability of concessions.

Polls taken by Israel's Opinion Researcch Institute show the prime minister climbing in popularity from 55.8 per cent in October to 61.2 per cent in November to 78.3 per cent in mid-December. His greatest strength, over 80 per cent, is among blue-collar, low income oriental Jews (responsible for his election) and voters aged 18 to 29.

Begin faces problems, including his repeated promises of new Jewish settlements on the West Bank. Indeed, despite President Carter's contrary demand, Begin insisted here that Jews must maintain full rights to create new settlements. His alternative offer to let Arabs "settle" in Israel is meaningless.

Nevertheless, Sadat's peace offensive has drastically changed Israeli public opinion on the West Bank settlements, and Begin knows it. Since Sadat's arrival in Jerusalem, prospective settlers are limited to Jews motivated by strong religious convictions such as the Gush Emunim - a tiny fraction of the population.

Even more starting is the prospect envisioned here by specialists on Arab affairs. They feel existing Israeli settlements such as the thriving Jewish town overlooking the Arab city of Hebron in Judea can survive under a self-governed Arab West Bank. That would require two remarkable conditions: Arabs willing to accept the Jewish town; Jewish residents willing to accept Arab local rule.

Such toleration on both sides would have been labeled out of the question a month ago. But Sadat's tough new line against the Palestine Liberation Organization and Begin's opening offer on the West Bank are creating a momentum that could turn the impossible of yesterday into practical political arrangements tomorrow.

Whether that momentum will continue is not certain. But the initial reaction to Begin's unveiling his peace plan here before giving it to Sadat has subtly been transformed after official study of Begin's fine print.

As forecast by the State Department analysis, the fierce Old Testament prophet that was Menahem Begin has softened. That truly changes everything in the Middle East.