Egypt suspended diplomatic relations with Cyprus yesterday in the wake of Sunday night's shootout at Larnaca airport, where the Cypriot national guard thwarted an Egyptian Entebbe-style raid on a terrorist-held jetliner.

Earlier in the day, Cyprus had freed the Egyptian commandos who survived the gunbattle - in which 15 Egyptian troops were killed - but had refused to hand over to Cairo the two Palestinian terrorists who held 16 persons hostage aboard the plane.

Egypt had mounted the commando operation in an effort to capture the two Arab gunmen, who had set off the two days of bloodshed by assassinating a prominent Cairo newspaper editor.

At a Cabinet meeting last night, the Egyptian government decided to order its deplomatic mission home from Cyprus and asked the Cypriot government to close its embassy in Cairo. An official statement accused Cyprus of adopting "an unfriendly attitude toward Egypt and its citizens," and called for a "reconsideration of all forms of Egyptian-Cypriot relations."

The entire Egyptian Cabinet then turned out late last night to greet the special flight that brought home the survivors of the Cyprus raid, along with 15 coffins.

Running through the Egyptian government thinking yesterday was the desire to put the best possible face on the ill-fated commando operation which was disastrously aborted when the Cypriot national guard opened fire on the 75-man Egyptian force as it rushed the parked plane.

In addition to the 15 Egyptians killed, 14 others wounded and two were reported missing - quite possibly burned to death when a Cypriot shell set ablaze the Egyptian C130 which had brought the commmandos to Lanarca. Seven Cypriots were wounded in the fighting.

While the Egyptian decision last night to recall its diplomats homefrom Cyprus stopped short of a complete break in relations, it reflected public anger with the Cypriots for thwarting the effort to capture the Palestine gunmen and rescue the hostages.

"The Cypriots turned what has been a humanitarian rescue mission into a violent tragedy," a senior Egyptian Foreign Ministry official said.

Government officials disagreed with the very least, the commandos' action resulted in the release of the hostages - something that had not been accomplished by two days of negotiations.

But Cypriot officials disagreed with that thesis. They accused Egypt's military attache, Capt. Fuad Takki. of a moment when it appeared that a surrender by the two terrorists was imminent.

Even before the Egyptian decision to suspend relations. Cyprus had demanded that Cairo recall the military attache, and he returned home last night.

A major factor in Egypt's decision to send the commandos to Cyprus was clearly the Egyptian conviction that the Cypriots lack the will to deal sternly with terrorists.

Egyptian sources point to the fact (See CYPRUS, A10, Col. 1) (CYPRUS, From A1) that Cyprus last year allowed Palstinian hijackers to leave the island after surrendering a hijacked Duten KLM jetliner. They note, too, that Cyprus refused to permit West German commandos to storm the Lufthansa plane that eventually was successfully recaptured in Mogadishu, Somalia.

Particulary shocking to Egyptians in the early stages of this latest saga were television sequences filmed shortly after slaying of Yussof Sebai, editor of the Cairo newspaper Al Ahram, who was gunned down in the lobby of the Nicosia Hilton where he had been attending an Afro-Asian Solidarity Organization meeting.

The television film showed the Cypriot security forces passively looking on while the terrorists, who had rounded up a couple dozen hostages, disregarded elemantary precautions by turning their backs on police as they herded their captives aboard buses.

Many Egyptians interviewed at random yesterday appeared convinced that the Cypriots were in active collusion with Egypt's enemies.

Left unsaid officially were strong hints that the commandos attacked because Egypt was convinced that Cypriot President Spyros Kyprianou had arranged, in a telephone call with Syrian President Hafez Assad, to allow the hijacked plane to fly to Damascus, where the gunmen would be released to the Palestine Liberation Organization.

Egyptian sources in Cyprus also said the Cypriot government intended to give the two assassins Cypriot passports. Two blank passports were sent in an official's hand at the Larnaca airport.

But Cypriot sources said that while an offer of passports may have been made to the two Arabs, it was only a ruse to get the men to surrender.

A Cypriot government spokesman said yesterday that Cyprus intended from the outset to obtain the gunmen's surrender, and to prosecute them.

Cypriot officials, for their part, were vehemently critical of Egypt for what they said was duplicity in sending an armed force here unannounced to attempt a unilateral military operation.

Officials in Nicosia said President Sadat never raised the question of an attempt to overpower the terrorists in a telephone conversation with Cypriot President Kyprianou.

But the Ehyptian Foreign Ministry said Cairo had informed the Cypriots Sunday that a "special plan" would be sent to Larnaca "carrying a group of people who will assist in dealing with the emergency."

"What did they think was on the plane - sandwiches and cake?" an Egyptian official asked.

While the question of exactly what the Egyptians told the Cypriots remained unclear, somewhere along the line, Egyptian officials - eager to punish the two men who murdered a confidant of President Sadat - evidently decided that the Cypriot authorities would stand still for the fait accompli [TEXT OMITTED FROM SOURCE] of an Egyptian intervention.

It would have been "total suicide to storm the plane if we had known the Cypriots were going to shoot back," a high Egyptian Foreign Ministry official said. "We took it for granted that the Cypriots would cooperate fully . . . "

It was noted here, however, that Egyptian officials have yet to challenge a statement Sunday by Cypriot spokesman Miliades Christodoulou, who insisted that Cairo was forewarned that "we will shoot if a single soldier comes down (from the C-130) without our permission."

Whatever its original intentions regarding the two terrorists, Cyprus - which has long tried to stay out of inter-Arab and Arab-Israeli conflicts - now is faced with trying the two Arab gunmen.

The two - named in court as Samir Mohammad Qatar, 28, a Jordanian, and Nayed Hussein Ahmed Alali, 26, a Kuwaiti, but both identifying themselves as Palestinians - were arraigned yesterday on charges of premediatated murder.

Judge Petros Michaelides fixed Feb. 27 as the date for a preliminary hearing.

All but lost in the confusion of the events was the Palestine Liberation Organization's denunciation of the whole affair as "treason against the Palestinian cause" carried out by Iraqi intelligence agents.

The often well-informed Beirut newspaper As Safir said the Cyprus terrorists attack was masterminded by the Aby Nidal, an Iraqi-based renegade former official of the mainstream Fatah organization, the bigest single component of the PLO.

The newspaper said the two gunmen had confessed their relationship with Abu Nidal whom the PLO accused of killing Said Hammami, its pro-Western London representative, last month.

Syrian Radio ridiculed the Egyptian "act of piracy" which it said had ended in "total failure . . . a fiasco."

The Cairo newspaper Al Akhbar picked up on such reasoning by stating, "It is clear there is collusion between Kyprianou and his government and Palestinian terrorism and the baathist government in Damascus."