A time-bomb planted in a garbage can by Palestinian guerrillas exploded in a crowded market square yesterday in the Israeli coastal town of Netanya, killing two persons and wounding 43 others.

Police said six Arabs picked up near the scene were being held for questioning and several other Arabs were taken into protective custody.

The Palestinian news agency WAFA said in Beirut that five persons were killed and 55 wounded in the Netanya attack by a commando unit formerly under the command of Palestinian leader Abu Hassan. Hassam, credited with masterminding the Munich Olympics slaying of Israeli team members, was killed in a car bomb blast in Beirut last Monday for which the Palestinians have blamed the Israelis.

The Netanya incident came as U.S. mediator Alfred Atherton flew back to Washington after an unsuccessful 12-day attempt to arrange resumption of the stalled peace treaty talks between Israel and Egypt. Israeli Prime Minister Menachem Begin blamed Egypt's "negative attitude" for failure of Atherton's mission and said his government was prepared "to continue the negotiations on the unresolved issues."

In Damascus, meanwhile, Syrian and Iraqi leaders began talks aimed at merging their two countries into a single state.Although officials of both sides have talked enthusiastically about "total unity," informed diplomatic observers believe a full merger is some way off.