Egyptian Prime Minister Mustapha Khalil said last night his government is recalling its two top negotiators from the Israel peace talks here for consultations.
Defense Minister Kamal Hassan Ali and acting Foreign Minister Boutros Ghali will return to Cairo this weekend after hearing the latest Israeli proposals, the prime minister announced at a news conference.
The Egyptian decision, announced as Hassan Ali and Boutros Ghali were meeting with Secretary of State Cyrus R. Vance, initially caused confusion in Washington. The two emerged from the meeting to say they had no formal word of their recall and were still awaiting instructions.
However, the expectation was that word of Cairo's decision would be relayed to them officially during the night and that the talks, which last weekend seemed on the verge of a successful completion, will be entering a new period of uncertainty.
The Egyptian decision came as the Carter administration worked to prevent a dispute over Israel's announced intention to expand settlements on the West Bank of the Jordan River from becoming an obstacle to completion of an Israeli-Egyptian peace-treaty.
The Israeli cabinet announced that intention earlier this week, partly, it is thought, to assuage conservative opinion in Israel.
Israeli Foreign Minister Moshe Dayan said here yesterday he saw no reason the West Bank issue should become an impediment in the talks with Egypt.
But Egyptian President Anwar Sadat's government has been unhappy with the Israeli cabinet action, and had threatened to recall its negotiators in protest.
As a result, a tentatively scheduled meeting yesterday of the three delegations was called off. Instead, Vance met separately late yesterday with leaders of the Israeli and Egyptian teams in hopes of restoring momentum in the negotiations.
This U.S. effort to stave off potentially costly delays came only six days after the negotiators here had announced agreement onthe main elements of a draft treaty. Some even had predicted that a final agreement would be reached by this weekend.
Adding a counterpoint to the uncertainty now surrounding the talks was the announcement yesterday that Sadat and Israeli Prime Minister Menachem Begin have been awarded the Nobel Peace Prize for their efforts to end 30 years of hostility between their countries.
Reporters covering the negotiations chortled when the State Department spokesman, Hodding Carter III, read a statement from Vance congratulating the two and adding: "we are proud the United States had been so closely associated with their achievements."
Prompting of the laughter was awareness of the anger that the Carter administration has expressed publicly - and more vehemently in private - over the Begin government's decision Wednesday to "thicken" Israel's West Bank settlements.
The administration fears that the Israeli action will be regarded as a deliberate provocation in the Arab world and force Sadat, who is sensitive to Arab concern about the future of the West Bank, to pull back from a quick conclusion of the peace treaty.
That the administration is still angry was acknowledged obliquely by Dayan after he met with Vance yesterday morning. Asked if they had resolved the dispute, Dayan replied: "No, I'm afraid not. Each party maintained their own position, and you know both of them."
He added: "I think the American position is very much against the Israeli cabinet decision."
U.S. sources said part of the administration's anger was provoked by Israeli assertions that the decision on the settlements was in response to statements made by Harold Saunders, assistant secretary of state for near eastern affairs.
During a recent visit to the West Bank, Saunders told Palestinians there that the status of Israels remaining in the settlements would be subject to negotiations.
That statement, Dayan said Thursday, caused great concern in Israel and forced the Begin cabinet to take steps reasserting its claims to the right of Israelis to settle on the West Bank, which Israel has occupied since 1967.
U.S. sources said the attempt to single out Saunders was what some called "a cheap shot," to disguise what they regard as the real principal reason behind the settlements decision - Begin's need to assuage conservative members of his government who oppose parts of the draft treaty.
The sources contended that Saunders, who was in the Middle East to answer questions by Jordan's King Hussein about the agreements reached at the Camp David summit, said nothing that contradicted previously stated U.S. policy positions.
Elaborating publicly on that point yesterday, George Sherman, a State Department press officer serving as spokesman for the Middle East talks, said:
"Assistant Secretary Saunders' mission was within the scope of the Camp David accords, and his discussions with Palestinians were within the scope of the Camp David acords."
Some U.S. sources said the administration was weighing the possibility of showing its displeasure at the Israeli course by postponing a scheduled U.S. mission to discuss sites for new air bases the United States has agreed to help build in Israel and by delaying agreement on sending another mission to discuss U.S. compensation for Israel's cost in withdrawing its forces from the Sinai Peninsula.
But, the sources added, Washignton's most immediate concern is to keep the dispute over the settlements separated from the effort to get agreement on the draft treaty.
The principal problem involves resolving lingering Israeli and Egyptian differences over treaty language that would cite the need for a future solution to the problem of the West bank and the Israeli-occupied Gaza Strip and its Palestinian inhabitants.
Concern about these questions in the Arab world has been the chief factor in causing other important Arab states such as Jordan and Saudi Arabia to keep their distance from the Camp David accords.
The Saunders mission to Jordan was an effort to ease Hussein's doubts about the future of the West Bank, and President Carter discussed the matter yesterday with Saudi Arabia's King Khalid at a White House luncheon.
According to a White House annoucement, Carter informed Khalid of the current status of the negotiations and the king "assured the president that Saudi Arabia appreciates greatly the efforts which the president is making to help bring lasting peace to the area and desires to remain in close contact with the United States about them."
In the U.S. view, bringing these countries into the process preacefully negotiating their differences with Israel is vital to an enduring Middle East peace.
It is for that reason that the administration considers Israel's latest action on the West Bank settlements an unnecessarily provocative and badly timed move that could complicate both the current talks with Egypt and the effort to broaden the peace process.