An elite squad of armed Palestinian guerrillas fought alongside Greek Cypriot National Guard forces in Sunday night's gun battle in which an Egyptian commando force was decimated at Larnaca airport, well informed sources said yesterday.

Wearing civilian clothes and carrying Soviet-made AK47 automatic rifles, members of the 12-man crack unit of the Palestine Liberation Organization were on the tarmac and took part in the 45-minute firefight that followed an attempt by the Egyptian commandos to storm a terrorist held jetliner.

Despite official Cypriot evasiveness on this point, the Palestinians' participation in the Larnaca airport battle is likely to further increase tension between Cyprus and Egypt.

Egypt suspended diplomatic relations with Cyprus Monday, angered by the incident in which 15 Egyptian soldiers were killed, and 14 others wounded. Two Egyptian commandos were reported missing, possibly having burned to death when a Cypriot shell set ablaze their C130 aircraft.

The Egyptians had mounted the Entebbe-style raid in an effort to capture two Arab gunmen who assassinated a prominent Egyptian editor in Nicosia, then took 11 hostages and commandeered a Cypriot jetliner with a crew of five.

The Palestinians' exact role at Larnaca airport and the number of casualities they may have inflicted on the Egyptians were not immediately clear.

But the sudden appearance of the unexpected opposition clearly worsened the Egyptians' disarray, according to foreign pilots watching the battle at close quarters.

A Cypriot government spokesman said the government here had no knowledge of any Palestinian combat at Larnaca, and Cypriot President Spiro Kyprianou earlier told a press conference that "the only PLO men who came to Cyprus at the request of the government were a delegation sent on (PLO chairman Yasser) Arafat's instructions in order to help convince the culprits to surrender." Kyprianou refused to divulge the size of the "small" delegation.

However, reliable diplomatic sources here said that the elite squad, headed by Arafat's own security head, traveled to Cyprus aboard a Cyprus Airlines aircraft which went to Beirut to bring back the two publically visible PLO delegates.

While the two assassins made their 24-hour roundtrip flight to Djibouti, the secret squad stayed overnight aboard the Cyprus Airlines plane. When it became clear Sunday the commandeered plane was returning to Cyprus with the gunmen and their hostages aboard, the Palestinian unit was smuggled into a closed and darkened room in the Larnaca terminal building.

When fighting erupted, Palestinians were recognized in it by eyewitnesses who speak both Greek and Arabic.

The government also contends that the PLO men arrived here unarmed, yet news photographs show identifiable PLO members with their familiar Soviet-made Kalashnikovs. This classic guerrilla weapon is also a favorite among the private militia of Cypriot Socialist leader Vassos Lyssarides, whose followers were also seen at the airport.

Lyssarides, who himself was an early hostage and then was released to take part in the negotiations, leads a strongly pro-Arab party here with growing Libyan links and a long history of political and military cooperation with Syria and the PLO.

The Palestinians' exact mission remains mysterious Israel radio reported a plan for a combined Cypriot and Palestinian force to assault the plane. Arafat and the PLO mainstream may well have been embarrassed by the terrorism of ultra-rejectionist Palestinians.

However, the Cypriot government has firmly denied ever enlisting any outside aid to overpower the gunmen. Cyprus might be embarrassed to admit it in the face of fierce Cypriot rejection of any Egyptian power play here, diplomats point out. Kyprianou told a news conference. "I hope there will be a favorable response from the Egyptian side."

In Cairo, a spokesman for Sadat said the Egyptian leader has no immediate plans to meet with Kyprianou.

Kyprianou said the Egyptian ambassador and military attache had been advised that two Arab gunmen holddeered Cyprus Airways DC-8 had agreed to release their captives and surrender Sunday night. Despite this and Egyptian assurances the commandos would not be employed, the armed assault was launched, he said.

State forces had no alternative but to intervene and take action to save the hostages and to protect the sovereign rights of the Cypriot state," he said.

In Cairo, the leader of the commandos said he ordered the attack after waiting for 90 minutes without word of progress in the negotiations. Brig. Nabil Shukry said he had no way of knowing if conditions had been worked out for the release of the 11 hostages and four crewmen of the plane.

"If the Cypriot forces had not interfered, the operation would have succeeded without a single drop of blood," Shukry said.

Kyprianou told reporters he had received no official word from Egypt on its decision to have Cypriot and Egyptian diplomats withdrawn from Cairo and Nicosia. He said judging from news reports, the action "does not mean the breaking off of relations." There was no indication Egypt has responded to his offer for a reconciliation meeting.

The two terrorists were arraigned in a Nicosia court Monday on murder charges. Cyprus refused Egyptian demands for their extradition, saying it was impossible under Cypriot law.