Egypt moving toward a complete break with the recognized Palestinian leadership, has decided to revoke the special privileges that have been accorded to Palestinians living in this country.

The move follows a wave of anti-Palestinian sentiment in Egypt that the government has done nothing to discourage. It has included personal attacks on Yasser Arafat, chairman of the Palestine Liberation Organization, who has always been treated here with deference in the past.

Egyptian officials blame the Palestinians for their role in the slaying of a prominent Egyptian writer by two Palestinian gunmen in Cyprus and say they believe reports that Palestinians participated in the Larnaca airport shootout that left 15 Egyptian commandos dead.

But the Cyprus affair only crystalized anti-Palestinian sentiment that has been brewing since the PLO joined Arab rejectionists in opposing President Anwar Sadat's peace initiative.

Besides inflaming the inter-Arab tensions that followed Sadat's quest for peace with Israel, the rupture between Egypt and the Palestinians could hinder the Middle East peace negotiations. Egypt still claims to be seeking a settlement on behalf of the Palestinians, and has the approval of the United States to play that role, but Cairo's credibility as a representative of palestinian interests, already questionable, is now likely to be further diminished.

The retaliatory steps against Palestinians here were announced as three leading Cabinet officials reported to be a special meeting of the parliament on the Cyprus incident and its aftermath. The three - Premier Mamdouh Salem, War Minister Mohammed Gamassi and Interior Minister Nabawi Ismail - said the Cyprus attack was the beginning of a campaign of terror against Egypt fomented by the rejectionist Arabs, including the PLO, who have committed themselves to thwarting Sadat's peace inititive.

Ismail said security has been rein-forced at Egyptian airports, harbors and other vital installations, and said that prominent Egyptians will have protection when they travel abroad.

Gamassi, in a bitter attack on the Cypriot government of President Spyros Kyprianou, said the Cypriots showed a "negative and casual attitude" to the slaying of Yussef Sebai and the taking of hostages by the gunmen, failed to arrest the assassins when there was still time and "surrendered to the terrorists."

Some Egyptian officials are saying privately that Sadat overreacted to the killing of Sabai, a close friend, but Gamassi gave no indication that he has had any such second thoughts. On the contrary, he said Egypt was ready to do it again if necessary.

"We feel this operation will not be the last and other operations are ahead of us," he said. "The armed forces will remain alert to protect Egypt's security, sacrificing their sweat and blood."

Sadat, at the funeral last week of the Egyptian commandos, said that Egypt would revenge itself tenfold against the Palestinians who were responsible, but it came as a surprise to observers here that the retaliation would fall on the shoulders of ordinary Palestinians who live here and mostly had nothing to do with the Cyprus affairs or the rejectionist campaign.

Premier Salem said that henceforth the estimated 30,000 Palestinians in Egypt "will be treated equally with the citizens of other Arab countries." Legislation stripping the Palestinians of their special privileges would soon be submitted to the parliament, he said.

Egypt, like many Arab countries, has accorded a special status to Palestinian residents as an indirect contribution to the Palestinian movement. Unlike other Arabs, Palestinians here are allowed to engage in trade and own taxis, they are exempt from sometaxes and currency control regulations, entitled to the same public serivces and educational opportubities as Egyptians and are permitted to own property.

It was not clear how the revocation of this special status would penalize those Palestinians Sadat holds reponsible for the Cyrus incident, but some Egyptian observers said they expected the new ruled to be applied selectively against Palestinians actively associated with the PLO or with anti-Egyptian activism.

Premier Salem did not mention either the PLO or Arafat in his address to the parliament, but he said that "those claiming leadership for the Palestinians have delivered themselves to the rejection front and we shall treat them as such."

The Palestinians who live in the occupied territories support the peace initiative, he said, and have sent representatives here to show that they back Sadat. Egypt "will not forget" those Palestinians, he said, nor "leave them alone to face other Palestinians who are trying to trade on Palestinian rights."

This seemed to be a clear indication that Egypt is still trying to encourage the emergence of a new Palestinian leadership inside the occupied territories, who would welcome peace with Israel or at least accept it. This leadership would apparently supplant the Beirut-based PLO and its allies, scorned by Sadat as "night club militants."

Sadat himself indicated that this was coming late last year, after the PLO took part in the rejectionist summit in Libya and accepted the resolutions aimed at destroying his peace campaign. He said then that he and King Hussein of Jordan agreed that by going to the Tripoli summit the PLO had "canceled" the resolutions of a 1974 Arab summit conference that recognized the Plo as the "sole legitimate representative" of the Palestian people.

Officially, Egypt still adheres to that resolution and still recognizes the PLO as the only authorized representative of the Palestinians. Yesterday's developments came within a hair of formal repudiation of that policy, however.

Following the expulsion or deportation of several PLO officials who lived here and of the Cairo representative of Fatah, the main Palestinian guerrilla group, little remained of the good relationship with the PLO that Egypt labored throughout the Lebanese civil war to rebuild. Yesterday's moves by the government striking not just at the leadership but at ordinary Palestinians, dismantled most of what was left.

There is a great potential risk for Egypt in doing that, since it will provide ammunition to critics who charge that Egypt is playing the American game by seeking peace with Israel and selling out the Palestinians. That Egypt is willing to take the risk is a measure of the outrage Sadat felt over the killing of Sebai and the deaths of the cammandos, as well as his anger at the Arab rejectionists.

Anti-Palestinian feelings here are running so high that the editor of the mass circulation Al Akbar, Moussa Sabry, took the unusual step yesterday of using his daily front page column to denounce Arafat personally.

"We used to receive him warmly in Egypt and treated him a head of state," Sabry wrote. "We opened our minds and hearts to him and appreciated him as a man of clear judgement . . . But Yasser Arafat has now changed." He said Arafat has now changed." He said Arafat had joined hands with rejectionists and with "international communism" and warned that "no Egyptian citizen will accept or condone" the Palestinian attacks on Sadat.

The PLO leadership apparently knew the government was planning to take action against Palestinian to take action against Palestinian residents here because PLO officials have been trying to head it off. None of the few PLO officials still in Cairo could be reached for comment last night.