Israel, in a sharply worded Cabinet statement read by Prime Minister Menachem Begin, accused the United States yesterday of "taking sides" in the Middle East peace negotiations through its criticism of Israeli settlements in occupied Arab territory.

But there were also authoritative reports last night that Israeli Defense Minister Ezer Weizman has ordered a stop to all work on new settlements in the northern Sinai, the most sensitive projects in the current negotiations.

Senior Israeli Defense Ministry sources said Weizman halted the projects because he was convinced that the work was politically harmful. Weizman wants new top-level discussions within the Israeli government on the entire subject of these outposts in occupied territory, they said.

The statement by Begin and the Cabinet contained the sharpest criticism the eight-month-old government has made of the United States. It was directed at remarks made Friday by Secretary of State Cyrus Vance, calling the Jewish settlements in occupied territories illegal and saying that they "should not exist."

Begin said the Cabinet unanimously protested Vance's statement and considered it "in complete contradiction to the remarks made by the President of the United States" to Begin in December when Begin presented Israel's proposed peace plan to Carter.

Israeli Foreign Minister Moshe Dayan, speaking on NBC's "Meet the Press," also accused the Carter administration of siding with Egypt on the settlements issue.

"On this specific point on the settlements in the Sinai and about the West Bank," Dayan said, "I'm afraid that he (Vance) is taking sides, which won't make his job as a mediator any easier for us."

Asked why the United States would take sides against Israel, Dayan referred to Egyptian President Anwar Sadat's recent visit to Washington and said, "Maybe it's that the administration thinks that they should give more support to President Sadat or otherwise he won't be able to continue with the negotiations for peace."

The Israeli Cabinet statement said that Israel "stands by its view that the Israeli settlement program is in full harmony with international law and it always has been legal, legitimate and essential."

It said that, "the United States holds a different viewpoint." But, the Cabinet statement said, the Israeli peace plan, which provided for retention of some of the Sinai settlements, had been given to Carter in December and "during the course of the exchange in the White House not only was no reservation whatsoever made with regard to this reference, but the plan as a whole was received with a positive reaction."

The statement said that in Vance's remarks, "We have here an obvious contradiction in terms between taking sides by a mediator and his advice to conduct negotiations."

Vance is expected to begin a shuttle mission in the Middle East shortly in an effort to bring about a resumption of political talks between Egypt and Israel. The talks broke down over the issue of whether Israel should retain control of its settlements in the Sinai after returning the territory to Egypt.

The first sharp Israeli reaction to Vance's statement, made at a press conference Friday, came at a three-hour meeting Saturday night between Begin and U.S. Ambassador Samuel Lewis.

Although Lewis denied reports in the Israeli press yesterday that the talks were "difficult," and said he preferred to characterize them as "lively," senior Israeli officials described the atmosphere at the meeting as "tense."

Many high Israelis consider Vance's statement to be the most serious manifestation so far of what they see as an erosion in the Carter administration's policy toward Israel.

The reports of Weizman's intervention in the settlements issue in his capacity as military governor of Sinai were first broadcast over Israeli state radio and were later denied in a somewhat ambiguous statement issued by Deputy Defense Minister Mordechai Zippori.

But senior government sources confirmed the reports last night.

Members of the dozen civilian settlements in the northern Sinai also criticized the developmental work being done there, saying that it was detrimental to their own agricultural projects.

On Friday, former Prime Minister Yitzhak Rabin attacked the "ghost settlements" in the Sinai and said, "The whole subject is curious to me and I can say that as an Israeli I am ashamed of it."

"I do not agree on principle that the Israeli government should initiate new settlements in an area which we have decided to give back to the Egyptians," Rabin said. "This to my mind is a travesty of Zionism."