Egyptian President Anwar Sadat severed diplomatic relations with Cyprus yesterday, and angrily suggested the possibility of Cypriot government "collusion" with two Palestinian terrorists who assassinated a prominent Cairo newspaper editor last week.

Sadat raised the possibility in an impassioned address following a military funeral for 15 Egyptian commandos, who were killed in a bloody shootout with Cypriot forces at Larnaca Airport Sunday night as they attempted to charge a jetliner where the Palestinians held 16 hostages.

Washington Post special correspondent Joseph Fitchett reported from Nicosia Tuesday that well-informed sources said that a squad of armed Palestinian commandos had fought alongside the Greek Cypriot National Guard in Sunday night's gunbattle with the Egyptians.

The Cypriot government yesterday termed that report "malicious and totally untrue," and said "there were no Palestinian commandos at Larnaca Airport."

he Washington Post stands by Fitchett's report.

Cypriot President Sypros Kyprianou earlier in the day suspended Cyprus' deputy police chief, Pavlos Stokkos, "for communicating false information regarding the events at Larnaca Airport and for negligence in the execution of his duties."

The Cypriot government also arrested John Bierman, a British foreign correspondent based in Cyprus, and formally charged him with publishing a false report relating to the Larnaca Airport battle.

Bierman, in an eyewitness dispatch to the Reuter news agency, had reported seeing a Greek Cypriot officer, while driving an Egyptian soldier at gunpoint toward the terminal building where dozens of foreign reporters and cameramen were watching, fire "two shots at the Egyptian, who fell, apparently badly wounded."

In a statement yesterday, Bierman said he was not guilty of writing false news and added: "There were a number of eyewitnesses willing to substantiate my description of the incident."

Sadat's announcement yesterday that he was totally severing Egypt's diplomatic ties with Cyprus went well beyond Monday's decision to suspend relations, and reflected mounting Egyptian anger over the Cypriot government's handling of the affair.

Egypt's official Middle East News Agency in a lengthy commentary, earlier charged that Cyprus "took part in an international conspiracy to kill (Egyptian editor) Yussuf Sebei" and let his murderers, who subsequently rounded up hostages and herded them abroad a commandeered airliner, escape.

The agency's commentary said that "the Cypriot authoritaries became terrified of the possibility of (Egypt) arresting the two murderers" and as a result ordered Cypriot National Guardmen to resist the Egyptian effort to storm the airliner.

Sadat, addressing the commandos who survived the Larnaca raid, attacked Cypriot President Sypros Kyprianou personally and said "our recognition of him as president of the republic . . . is withdrawn as of today.

"There is no room for us to deal with dwarfs such as these." Sadat declared. The Egyptian leader when went on to pose the possibility of collusion.

"They were not able to arrest two criminals," Sadat said scornfully, "and this raises the question, 'Was there collusion or not?"

"We are ready to accept martyrdom for the sake of Egypt," he angrily added. "But we do not accept trickery or treachery. We answer attcks 10 fold, and the President of Cyprus is hearing me now."

Sadat also said that he personally had made the decision that the Egyptian commandos should go ahead and storm the jetliner at Larnaca Airport in an effort to capture the two Palestinian terrorists and free the hostages.

He said that the leader of the commandos, Brg. Nabil Shukry, had been "following what went on between the control tower and the killers, and it became apparent to him and to us here in Egypt also . . . that Cyprus was preparing two passports for the killers so they could leave Cyprus, as if they had not committed a crime."

Sadat disclosed that before flying to Larnaca, the Egyptian commandos had first set out for Djibouti, where the terrorists had taken the commandeered jetliner earlier, and said Egypt had received permission to stage an Entebbe-style raid on the plane there.

"I reveal for the first time that we contacted Djibouti, and Djibouti said it was completely ready to receive you (commandos) to carry out your duty," Sadat told the survivors.

The Egyptian President's anger yesterday was clearly fueled by the Cypriot government's insistence on trying the two Palestinians in Nicosia rather than turning them over to Egypt.

Flatly rejecting a suggestion by Cypriot President Kyprianou that they meet in an effort to ease the crisis, Sadat said he had nothing to say until "Cyprus hands over the hireling killers - and then we shall start talking."

Sadat coupled his attack on Kyprianou with one of his harshest attacks in recent months against the Palestinians.

"Egypt is defending the Palestinian cause everywhere while the Palestinians are going to nightclubs and offering themselves for hire as assassins and terrorists," he said.

Earlier, Sadat, solemnly behind three closed ambulances carrying the coffins of the slain soldiers, had led 10,000 mourners from a mosque to the pyramid tomb of the unknown soldier.

Shouts of "Slaughter the Palestinians" and "No more Palestinians" rang out during the procession.

During the burial ceremonies, Sadat, who was reported to have been ailing for several days, appeared tired and supported himself with a stick.

Several hours after the funeral, the Egyptian government that Sadat was suffering from a severe chill and will spend a few days in Ismailia.