National Security Adviser Zbigniew Brzezinski said yesterday that a Middle East settlement should include arrangements for an "undivided" Jerusalem, a city which has been the emotional focal point of Arab-Israeli tensions.

"A city undivided means a city not partitioned, not partitioned physically, but a city in which, perhaps, arrangements can be contrived that are responsive to the religious and political sensitivities of the parties concerned." the presidential adviser said on "Face the Nation" (CBS, WTOP).

Both the Arabs and Israelis make religious and political claims to Jerusalem, which fell into Israeli hands in the 1967 fighting in the Middle East.

The Israelis have vowed to hold on to all territory captured in the 1967 war, while the Arab position has been that any settlement must include the return of the territory, including East Jerusalem.

Brzezinski carefully avoided saying that the United States wants a "unified" Jerusalem, presumably a more politically complicated task than more simply making the city "undivided."

"As well all know, this is an issue which is not just strategical-politcal," he said. "It's a deeply emotional, religious issue. But, with good will, I think we will find a solution whereby the city is undivided, accessible to all - with proper arrangements, not only for the religious, but for the political sensitivities of all parties concerned."

Brzezinski's comments on Jerusalem came as he restated the U.S. position that Israel must withdraw from territories captured in 1967 while the Arab, on the other hand, must guarantee Israel "secure frontiers."

The territorial question will be one of many major issues facing negotiators when peace talks between Egypt and Israel resume Jan. 16.

Brzenzinski said yesterday that Secretary of State Cyrus R. Vance is expected to attend the meeting in Jerusalem which, he said, "will address itself to the larger issues, both of substance and procedure."

Brzezinski expressed concern about Israeli settlements in the Sinai, which the Begin government has been under pressure to expand. Agriculture Minister Aprel Sharon had proposed establishment of 24 new civilian and military settlements before the next round of Israeli-Egyptian talks. The Israeli cabinet yesterday rejected that plan and endorsed Begin's policy of merely strengthening those already there.

Brzezinski said expansion of the settlements "might be a sign of poor judgement" by the israelis. If the settlements "are to be created and there is some uncertainly on this matter - that might complicate the negotiating process," he said.

The settlements question has become a major domestic issue in Israel at a time when Egyptian President Anwar Sadat is pressing his demand for full evacuation of the Sinai. Sadat said yesterday that "we shall not agree to the presence of any israeli soldier or civilian after a comprehensive agreement is signed."

Brzezinski said that a "frequently paintful negotiating process" still lies ahead of any peace agreement, and that "only a fool would fix himself" to a precise "date or time span" when such an agreement might come.

This year's talks "will mark very signficant progress," but the "final resolution of all issues might take us well beyond 1978," he said.

Brzezinski also said that the Palestine Liberation Organization has, at least for the moment, taken itself out of the peace talks by "maintaining an intransigent position" - refusing to have anything to do with the negotiations.

However, he refused to rule them out completely. "Moderate Palestinians will have to be involved," he said. "Moderate means that they will be willing to participate in the negotiating process on the same premises as the others."

Asked if he would define PLO members - who have called for the creation of an independent Palestinian state - as "moderate," Brzezinski said: "I don't think I should be in the business of defining anybody. They define themselves by their acts and their postures."

On another matter, Brzeninski said he believes that recent fighting between Cambodia and Vietnam represents "the first case of a proxy war between China and the Soviet Union."

"The Vietnamese are, clearly, supported by the Soviets, politically and militarily, by the Chinese," he said.

"Do you have any intelligence that Russian advisers are on the field - or Chinese advisers?" Brezezinski was asked.

"No, we do not," he responded. "The Cambodians, however, claim that there are" Russian advisers for the Vietnamese, he said, "and the fact that they are claiming it is itself politically important, even if untrue."