Israel's highest court today banned further construction of the controversial Elon Moreh settlement near the occupied West Bank town of Nablus and gave the government one month to show why the settlement should not be dismantled.

The settlement, which the government had envisioned as a sprawling urban center ultimately to be linked with Arab Nablus, was the first begun since the start of negotiations on autonomy for the occupied West Bank and Gaza Strip.

While the decision appeared to have only limited legal effect, it was clear tonight that it will provoke serious new political problems for Prime Minister Menachem Begin. Opponents of the government's settlement policy immediately seized on the court ruling as an opportunity to demand a freeze on Jewish settlements in occupied territories.

The ruling threw into further disarray the government's attempt to forge a unified settlement policy as Israel and Egypt begin critical talks on autonomy for the occupied territories.

It comes at a time of deepening divisions in the Begin Cabinet about when and where Jewish civilian settlements should be built in occupied areas.Mounting opposition to the settlements also is being voiced by the United States, by Egypt and, most recently, by European Common Market nations.

Attorneys for 17 Arab landowners who protested the government's seizure of serveral hundred acres of privately owned land noted that the stopwork order was issued on the narrow basis of the government's failure to serve requisition orders before beginning construction.

The court left unresolved the broader issue of whether the civilian outpost serves a legitimate military purpose and thus is in accord with Israeli and international law. It told the government to argue this issue in greater detail at the next hearing.

Legal sources noted that the one-month deadline for the government to show cause why the settlement should not be dismantled falls in the court's summer recess and that the case may not be heard again until September.

In the meantime, sources close to the lanowners said, Lon Moreh will remain intact, and since no settlement census has been verified by the area's Arab residents, there is no way of determining how many more settlers move into the stony hill top site about a mile southeast of Nablus.

Nablus military governor Yosef Lunz, who ordered work stopped in compliance with the court decree, visited Elon Moreh today and counted the residents. Reportedly 27 families and several single settlers are living there.

In its ruling today, the High Court of Justice issued a temporary restraining order prohibiting further work on the ultranationalist Gush Emunim (Faith Bloc) settlement, although it said the settlers could errect a security fence around the 16 concrete prefabricated structures already in place.

In a lightning-fast, military-supported operation on June 7, Gush Emunim and the World Zionist Organization cut a new road to the Elon Moreh site and began erecting houses, Modular houses that had been earmarked for other settlements were quickly trucked into the remote site, in what Arab landowners viewed as an attempt to establish a de facto presence before the High Court could hear the case.

The court ruled, however, that the military governor failed to serve notice on some of the landowners whose property was seized, an oversight that Court President Moshe Landau said led to "understandable" anger and bitterness on the part of nearby Arab residents.

The land seizure contradicted the government's oft-stated policy of avoiding expropriation of private land except for the establishment of military facilities. The government has conceded the Arab villagers' claim that some cultivated land was taken for the new Elon Moreh road.

Israeli Army Chief of Staff Rafael Eitan today submitted to the court a statement that Elon Moreh is essenial for security because it provides a strategic position for the control of critical roads.

The Arab landowners countered with statements by former chief of staff Chaim Bar-Lev and former Army General Matty Peled that Elon Moreh is a purely civilian enterprise and does not fulfill an essential role for security. Bar-Lev reportedly wrote that since the site is near a densely populated Arab town and distant from the main road, the Army would probably have to use troops for its defense in the event of hostilities.

On March 15, the High Court, which exclusively determines the legality of government actions, handed down a landmark decision in a similar case that would appear to minimize the Arab landowners' chances for victory when the Elon Moreh case comes up again in September for a permanent injuction.

In a case involving the seizure of land for the construction of Gush Emunim's Beit El settlement near Ramallah, the court ruled that civilian settlements are necessary for security and that they ease the burden of the Army in the occupied territory.

Consequently, the court ruled, the Israeli government was not in violation of the 1906 Hague Convention prohibition against an occupying power transferring part of its civilian population into territory it occupies.

While there is no disagreement in Begin's Cabinet on the broad question of Israel's right to establish Jewish civilian settlements in the West Bank, there are sharp differences of opinion on how to go about it and widely differing bases of justification.

Begin bases the right on Israel's claim to the biblical land of Israel, which stretched from the Nile to the Tigris and Euphrates rivers, and he repeatedly invokes Israel's ultimate claim to sovereignty on the West Bank. Agricultural Minister Ariel Sharon, a leading cabinet hawk, stresses the securilty aspect, arguing for strings of outposts along the Jordan Valley and the ridges running through the Judean and Samarian hills.

Defense Minister Ezer Weizman, on the other hand, supports the right to settle in the West Bank, but he objected strenuously to the Elon Moreh settlement because it involved land seizure and came at the start of delicate autonomy negotiations with Egypt. Weizman refused to sign requisition orders to Arab landowners, until the Cabinet, in effect, ordered him to do so.

Also opposing Elon Moreh were Deputy Prime Minister Yigal Yadin and Foreign Minister Moshe Dayan, although both have since said they will accede to the Cabinet majority.

The Peace Now movement, which campaigned actively for Israel's withdrawal from the Sinai Peninsula and the dismantling of settlements there in exchange for a peace treaty, has begun a new round of demonstrations against West Bank settlement. CAPTION: Picture, Israeli settlers and soldiers erect a prefabricated house at Elon Moreh before the High Court ordered work halted. AP