The Israeli government is quietly drafting a hard-line formula for Palestinian autonomy on the West Bank and Gaza Strip designed to severely restrict Arab selfgovernance if a peace treaty is signed, Israeli sources said tonight.

The officials involved in the drafting have accepted as an overriding principle that autonomy for West Bank-Gaza residents should not include the right to eventually create an independent Palestinian state, the sources said.

The formula also calls for special Israeli water, land and settlement rights on the West Bank, which are certain to inflame West Bank Palestinians, who for the most part have already rejected the "framework for peace" signed at the Camp David summit.

The future of the occupied West Bank is one of the most difficult parts of the Arab-Israeli dispute. While Egypt has been pressing for autonomy for the West Bank, Israel's fear of a hostile Palestinian neighbor has led top strategists to conclude that rather than permit the emergence of a Palestinian state, Israel would be better off reverting to the occupation regime it has maintained since the 1967 war.

Top officials of the Defense Ministry met in Tel Aviv today with Prime Minister Menachem Begin's highestranking aides and made several sweeping policy recommendations that would give West Bank and Gaza Palestinians the right to administer their own municipal services but little else, informed sources said.

Under a set of "autonomy principles" agreed upon at the meeting, Palestinian Arabs would be permitted to elect governing councils to administer some of their affairs, but the councils would never be permitted to form a legislative body with constitutional powers to enact laws that conceivably could lead to a Palestinian state.

When Israel negotiates on the West Bank-Gaza issue, the committee concluded, it should do so from the position that the military government will not be abolished, but that its "presence" will simply be withdrawn.

The autonomy given to the 1.1 million West Bank and Gaza Palestinians would derive its power from the authority of the military government, since it would be the military government that would issue an order establishing de facto autonomy.

If the Palestinians' limited governing council declared itself a constitutional assembly, according to this legal formulation it would be abolished and the military government would resume control.

The guideline closely follows Begin's long-held precept that individual Arabs on the West Bank and Gaza Strip should be given autonomy, but that the areas themselves should not be allowed to become collectively autonomous in the sense of constitutional democracies.

Before reaching its conclusions, government sources said, the committee heard a report that predicted that governing council elections in the West Bank and Gaza will inevitably lead to a majority of Palestine Liberation Organization members.

Moreover, the military and government leaders concluded that while Israel's occupying military government will be physically dismantled in heavily populated areas of the West Bank -- such as the Nablus, Ramallah and Hebron areas -- it will not be completely withdrawn from the territory. Some measure of military administration will remain in sparsely populated areas, particularly those inhabited by Jewish settlers, according to government sources.

Underlying these positions is the notion that traditional Arab animosity must not be allowed to progress into acts of terrorism against Israel, and that conditions should be created that could lead to peaceful coexistence of the West Bank and Gaza between Jews and Arabs.

Today's meeting chaired by Eliahu Ben-Elissar, director-general of the prime minister's staff, was one of several recent forums held to discuss Israel's position when the time comes for negotiations on the future of the occupied areas.

The meeting followed the drafting of an interim report by the directorsgeneral committee to devise West Bank-Gaza bargaining positions. The report, which has not been made public, will be presented to the Cabinet for a decision.

The committee, also headed by Ben-Elissar, reportedly will make three major recommendations to Begin, according to informed sources:

A quarter of a million acres of "state land" in the West Bank will be retained by Israel even after autonomy is implemented. The land, which represents one-sixth of the territory, belonged to the Jordanian crown council before 1966, and Israel intends to retain "trusteeship" of it at least until Jordan joins the peace talks.

Israel will continue to control underground water resources in the West Bank. Government sources said that this is necessary to prevent a drain of underground reservoirs across the cease-fire line in Israel proper, resulting in possible salinization of Israeli water reserves from the Mediterranean Sea.

Jewish settlements within the West Bank and Gaza must be given a special Israeli jurisdiction -- "autonomy within autonomy," one official put it -- with regional Jewish councils governing all aspects of the Jewish posts independent of Palestinian autonomy. The Israeli Interior Ministry reportedly would fund the regional Jewish councils with about $5.5 million annually.

Critics of Begin's West Bank policy maintain that the Ben-Elissar committee's recommendations show that the government is merely trying to devise ways of circumventing real autonomy for West Bank and Gaza Palestinians through a series of legal "gimmicks."

They argue that neither Egypt nor the Palestinians would ever agree to a pact which gives Israel control over both public lands and water resources, because it would be impossible for Arabs to fully develop the territory agriculturally without control of both.

Moreover, Palestinians argue, without control of the former Jordanian state land, they will be unable to open the territory to Palestinian refugees because of a lack of suitable land.

The return of refugees from the 1948 war is not included in the Camp David peace plan, and Israel repeatedly has made clear its unwillingness to receive large numbers of dispersed Palestinians in the West Bank and Gaza Strip.