A visit to Spain this week by the Palestine Liberation Organization's leader, Yasser Arafat, is seen here as a diplomatic breakthrough for the PLO and is expected to curtail negotiations between Madrid and Jerusalem aimed at securing Spain's recognition of Israel.

A statement issued by the Madrid office of the PLO said Arafat, who is to arrive Thursday, has been invited by the Spanish government and will meet with Prime Minister Adolfo Suarez as well as other political leaders.

Arafat's visit, one of the first in which a Western European government is receiving him as an official guest, is part of the organization's bid for worldwide recognition. The drive to improve the PLO image in Europe also included Arafat's reception by Austrian Chancellor Bruno Kreisky in July.

A leader of Spain's Jewish community said the visit here would delay considerably the government's moves to recognize Israel. Spain and the Vatican are the only Western European states that do not have diplomatic relations with Israel.

Diplomatic sources said Arafat also was due to meet Communist Party leader Santiago Carrillo and the Socialist Party parliamentary secretary, Felipe Gonzalez, in addition to holding talks with leaders of the ruling union of the Democratic Center Party and government leaders.

High on the agenda in his talks with Spanish officials will be the precise definition of Spain's recognition of the PLO, which opened its office here in 1976. Spanish Foreign Ministry sources say the Madrid government has allocated to the PLO the equivalent of the observer status that the organization enjoys before the United Nations.

Although the PLO said that Arafat had accepted a Spanish government invitation, Spanish Foreign Ministry sources stressed that the Palestinian leader had negotiated the trip to Madrid himself and that the initiative had been his alone. Officially he is arriving on a working visit to explain to the Spanish government the Palestinian case in Middle East affairs.

At the United Nations, Spain has consistently voted in favor of the PLO and holds the withdrawal by Israel to the 1967 borders, including Jerusalem, and the recognition of the national rights of the Palestinians as central tenets of its Mideast policy.

This policy is framed by what is termed here as "Spains traditional friendship with Arab nations." Expressions of this policy in recent years were the Spanish government's refusal to allow U.S. Air Force convoys to refuel in Spain at the time of the six-Day war and a bar on Egyptian President Anwar Sadat when he sought to land here on his return from the Camp David peace talks.

A major consequence of the Mideast policy in Spain is the government's refusal to recognize Israel despite general agreement among the parliamentary parties on the necessity to negotiate diplomatic relations with Jerusalem. The ruling Democratic Center Party called for the recognition of Israel at its national party congress last year.

The government's hesitancy on the issue is related directly to Spain's dependence on Arab oil, according to Foreign Ministry sources.

The president of Madrid's Jewish community, businessman Mauricio Hatchwell Toledano, said he recently had been assured by Prime Minister Suarez that the recognition of Israel was only a matter of time. "But," Hatchwell Toledano said, "Arafat's visit puts the recognition to Israel on a shelf."

The Jewish community in Spain today was preparing an official note to the Spanish Foreign Ministry deploring the visit of the Palestinian leader "Spain has enough terrorists as it is," Hatchwell Toledano said, "there is no need to officially invite another one."