The Israeli government is embroiled in controversy over a Middle East peace proposal published in Vienna on Monday after a meeting there between Egyptian President Anwar Sadat and Shimon Peres, leader of Israel's opposition Labor Party.

The peace plan is being viewed by some here as a key to breaking the Egyptian-Israeli deadlock and by others as a clever ploy by Sadat to enhance his image as a peace advocate while at the same time creating internal division in Isreal

The plan was drawn up by Austrian Chancellor Bruno Kreisky and West German Social Democratic Party leader Willy Brandt for presentation to a Socialist International conference in Paris later this summer. Sadat publicly accepted the Kreisky-Brandt formula and Peres described it as "containing many positive elements."

Israeli Foreign Minister Moshe Dayan, however, has condemned the plan as worse for Israel than the formula developed by President Carter and Sadat at Aswan, Egypt, Jan. 4.

Dayan and other Cabinet ministers have accused Peres of attempting to return the Labor Party to power by creating the impression that Peres stands a better chance of reaching a peace agreement than does the government of Prime Minister Menachem Begin.

The Kreisky-Brandt plan, a vaguely worded document, calls for Israeli withdrawals in all occupied territories to secure boundaries to be negotiated. Begin's government has always rejected the idea of returning the west Bank and Gaza Strip to Arab control.

Dayan specifically condemned the Vienna plan's approach to the Palestinian problem. It calls for recognition of the right of the Palestinians to participate in the determination of their own future through negotiations in which "they elected representatives would take part."

Dayan retorted, "Ask my Arab from Nablus who that is," in an oblique reference to the Palestine Liberation Organization Nablus is a West Bank city that has been the scene of many Palestinian demonstrations."

Dayan and other supporters of Begin's Middle East policy have been sharply critical of the Labor alignment in parliament in general and of Peres in particular for helping develop a peace formula contradictory to Begin's proposal, which would give limited home rule to West Bank and Gaza Palestinian Arabs.

Dayan told the Parliment's foreign affairs committee yesterday that the United States and Egypt are likely to try to develop a declaration of principals when foreign ministers of the three countries meet July 18 in London. Implicit in his forecast was the suggestion that Peres had helped set the stage for peace declarations unacceptable to Israel.

In an effort to stem criticism by members of the governing Likudf action as well as by the opposition, Dayan, in a speech to the Likud faction of parliament Tuesday night, said, "If you and the opposition critize us, how do you expect the public to have faith in the government? If you don't like the government's policy, change the government, the policy or your own views."

Opposition members yesterday sought to portray Begin as foolishly passing up an opportunity for rapprochement with Sadat through the Vienna formula.

Former foreign minister Abba Eban, who is a member, of parliament, said, "I don't understand the emotional reaction of Dayan." Eban said the Kreisky-Brandt formula represents the first time since the 1973 Arab oil embargo that Israel has been able to "move Europe." He urged the Begin government not to lose the opportunity.

Eban said the Vienna plan is "largely the Aswan formula plus four improvements." He said the improvements assure that the final peace boundaries must be agreed upon by Israel, which, he said, excludes a return to the pre-1967 borders.

Referring to U.N. Resolution 242, which calls for Israeli withdrawal from occupied territories, Eban said. "I would accept the Vienna document against 242 anytime, and so would any sensible Israeli."

"If the Israeli government can be persuaded to move away from its own plan, there might be a parallel movement by the Egyptians," he added.

Referring to U.N. Resolution 242, which calls for Israeli withdrawal from occupied territories, Eban said, "I would accept the Vienna document against 242 anytime, and so would any sensible Israeli."

"If the Israeli government can be persuaded to move away from its own plan, there might be a parallel movement by the Egyptians," he added.

Reacting to reports that Eban had a hand in preparing the Vienna formula, the Hebrew newspaper, Maariv editorialied yesterday, "If it is true that Abba Eban is the real author of the document, then he can be proud of his achievement. He penned a paper that satisfied the desires of all parties to the conflict - with the exception of Moshe Dayan."

A foreign Ministry spokesman, when asked yesterday whether Dayan would explore the Vienna plan during the London conference, said, "Neither with Egypt."

The spokesman said that Sadat had aroused suspicions in Israel and elsewhere that the Vienna meeting was part of a plan by Sadat to create internal political feuding in Israel and to further cast Begin as an intransigent leader who does not want to make peace with the Arabs.