In a ruling that may lead to improved conditions or release for large numbers of prisoners, the Supreme Court held yesterday that inhumane confinement in isolation cells may violate the constitutional ban on cruel and unusual punishment.

The ruling was the first in which the court has applied the Eighth Amendment to physical conditions in penal institutions. The justices acted in a case from Arkansas, but the decision has major implications for numerous other states, most immediately Alabama, whose prison systems have been challenged in the federal courts.

The most important part of the three-phase ruling concerns the power of a U.S. district court judge to deal with the overall conditions of incarceration. The court ruled 8 to 1 that he is empowered to find a particular condition, such as punitive isolation, which is itself permissible, unconstitutional if it occurs in a context of other conditions that taken together are impermissible.

Some states say they can't afford to correct conditions that a federal judge has found intolerable, forcing them to consider releasing large numbers of prisoners on parole or to work-release and halfway-house programs.

That is what happened in Alabama after Judge Frank M. Johnson issued a sweeping remedial order in January 1976 to correct massive and admitted violations, such as overcrowding, violence, filth, and inadequate food, shelter, medical care and staff.

Unable to comply with some of the terms of the order, Alabama has released about 2,000 of 5,400 prisoners on parole, to work-release programs and to halfway houses, according to Alvin J. Bronstein, executive director of a national prison project in the American Civil Liberties Union.

In the second phase of yesterday's decision, the court empowered a federal judge to force compliance with his orders to improve penal conditions by upholding, 7 to 2, the award of $20,000 in attorneys' fees that Arkansas prison officials must pay to prisoners' counsel under the Civil Rights Attorney's Fees Act of 1976.

This was an award for uncontested "bad faith," Justice John Paul Stevens wrote in the opinion for the court. It "served the same purpose as a remedial fine imposed for civil contempt." he said. "It vindicated the district court's authority over a recalcitrant litigant."

The ACLU's Bronstein said that the prison project now expects to collect $70,000 in attorneys' fees for vindicating the rights of prisoners in a single state, Rhode Island.

The NAACP Legal Defense and Educational Fund, which filed the Arkansas case in 1969 to correct "barabarous conditions," termed the decision "a signal victory."

In the final part of the decision, the court upheld, 5 to 4, an award by the 8th U.S. Circuit Court of Appeals of an extra $2,500 for the prisoners' lawyers.

The state must pay the fees even though it claimed immunity under the 11th Amendment and was not a defendant in the lawsuit, and even though the fees law was enacted eight years after the litigation began, the court held.

Alabama may be the first state to feel the full impact of the decision because it has pending in the Supreme Court a petition for review of Judge Johnson's remedial order. Bronstein said he now expects the court to leave the order in effect, because yesterday's decision "affirms in every respect" what Johnson did. The conditions he found in Alabama's prisons were "even worse" than those in the Arkansas system, Bronstein said.

Federal courts have issued constitutional rulings against the prison system of Oklahoma, which lost on appeal, and of Rhode Island, New Hampshire and Arizona, none of which has appealed. Challenges to the prison systems of many other states, including Maryland, are being litigated.

In April, U.S. District Court Judge James Foreman ordered the U.S. Penitentiary at Marion, Ill., to close so-called "boxcar cells" used for solitary confinement. The cells have solid steel doors that prevent communication with the outside.

Yesterday's case is a sequal to a decision by then Chief Federal Judge J. Smith Henley in 1965 that the arkansas prison system routinely imposed cruel and unusual punishment, forcing the ordinary convict to live in "a dark and evil world completely alien to the free world."

A key issue was disciplining with punitive isolation: locking up four to 11 convicts in a windowless 8-by-10-foot cell with a water tap, a toilet flushable only from outside, no furniture, and, at night, mattresses that could spread infectious diseases. Meals provided fewer than 1,000 calories daily and consisted mainly of "grue," a baked paste made from various ingredients. Violence was rampant.

Henley tried repeatedly to have Arkansas improve conditions, but, after eight years of hearings and litigation, and after conditions had worsened, ordered a specific cure. It included a 30-day limit on punitive isolation and payment of the $20,000 in fees to prisoner' lawyers.

Duration of confinement "cannot be ignored" in deciding whether it "meets constitutional standards," Justice Stevens wrote for the court. "A filthy, overcrowded cell and a diet of 'grue' might be tolerable for a few days and intolerably cruel for weeks or months."

Justice William H. Rehnquist alone dissented. "No person of ordinary feeling could fail to be moved by the court's recitation of the conditions," but it "moved beyond the well-established bounds limiting the exercise of remedial authority by the federal district courts," he said.