The Israeli government today rescinded a 12-year-old statute prohibiting individual Israelis and Iraeli companies from purchasing private property in the occupied West Bank and Gaza Strip.

In a decision considered likely to exacerbate tension between Israel and the United States about expanding the Jewish presence in the occupied territories, the Cabinet decided that private Israeli citizens and corporations could purchase and register title to Arab land and then, with the approval of the West Bank or Gaza military governments, settle on it.

(In Washington, State Department officials said they could not comment on the Israeli decision until they received a full report on it from the U.S. Embassy there. The officials reiterated that the U.S. government believes new Israeli settlements on occupied Arab territory to be detrimental to the peace process, but they indicated that the administration so far has not taken any position on the question of purchases of Arab land by individual Israelis.)

Until now, Jewish civilian settlements sponsored by the state and built on requisitioned public lands could go ahead only with ministerial approval on the basis of security needs.

The prohibition against civilian land acquisition, imposed by the former Labor Party government after the 1967 Six-Day War, had been intended to curtail Jewish land speculation in the West Bank to confine Israeli settlement in the territory to narrow areas mapped out for security in the territorial compromise proposed by former foreign minister Yigael Allon.

Since in Jordan, which lost the West Bank to Israel in the 1967 war, the law provides for death penalties in absentia against West Bank landowners who sell land to Jews, it remained unclear tonight how much private Arab-owned land Israeli citizens will be able to purchase in the territory.

As recently as several months ago, the Jordanian Cabinet voted for the execution of two Arab sisters in the West Bank town of Beit Jala who sold their property to a Jewish buyer through an intermediary.

However, many tracts of land in the West Bank belong to absentee Arab owners who fled in 1967, and they presumably could sell to Israelis merely by returning long enough to reregister their deeds.

When asked about reciprocity in the decision, a Cabinet official said the prohibition against West Bank or Gaza Arabs' purchasing land inside Israel remains in effect, unless they agree to become Israeli citizens.

Aryeh Naor, the Cabinet secretary, said, "Of course they can't. Jordan is still in a state of war with Israel.

Naor and other government officials sought to minimize the political significance of the Cabinet decision, pointing out that revocation of the prohibition was a campaign promise made by Prime Minister Menachem Begin more than two years ago.

Naor said the change merely removes a discriminatory ban against Jews that does not exist anywhere else in the world except Arab states that do not permit the sale of land to non-Moslems.

"What would you say if the Congress passed a law saying that [U.S.] Jews cannot buy land in Chicago? What is the difference between the [former] prohibition and that?" asked Naor after the Cabinet vote.

When it was suggested that Chicago was not an occupied territory, Naor reiterated Israel's position that Jordanian sovereignty over the West Bank after it captured it in 1948 was recognized by only two nations and no Arab states.

Another aide to Begin, referring to Jordanian King Hussein's Hashemite kingdom and to Nazi-era laws that took Jewish land, said, "This is the repeal of the Hashemite Nuremberg law."

But beyond eliminating an Israeli statute, the Cabinet decision also, in effect, abrogates the sales prohibition in Jordanian law, which still applies in the West Bank.

Under Israeli supervision, civil cases in the West Bank are tried under Jordanian law before Arab judges, as are criminal cases not involving security offenses, which are handled by Israeli military tribunals.

Israeli officials were quick to point out that there is precedent for changing Jordanian law in the West Bank since 1967, such as when suffrage was written into election laws and mandatory automobile liability insurance was added to traffic laws.

When asked whether revocation of the prohibition against Israeli purchase of Arab land would not lead to a proliferation of privately funded Jewish civilian settlements, thereby making a political solution of the West Bank territorial dispute more difficult, Naor said that the West Bank and Gaza military governments still will have the right to restrict habitation there of more than 48 hours.

"A man can buy private land, but if he wants to make a home he has to get permission," Naor insisted. But when pressed on the question of whether the military government would actually deny habitation rights to an Israeli who had purchased Arab land, the Cabinet secretary replied, "For the time being, we have the principle: From now on, Jews can buy land in Judea and Samaria and the Gaza Strip." Judea and Samaria are the Biblical names for the West Bank.

"There are ads in the paper where you can buy land in Switzerland. Why go to Switzerland? Go to Nablus instead," said Naor, referring to the largest Arab city in the West Bank.

Naor said removal of the prohibition was first raised six months ago by Defense Minister Ezer Weizman and that a draft resolution was approved by the attorney general's office. Purchase of West Bank land by private Israeli citizens is included in Israel's 26-point autonomy proposal, although Naor rejected the notion that Israel was unilaterally imposing one article of the autonomy scheme without the approval of the Egyptian negotiators involved in implementing the Camp David accords.

Although Naor professed to know nothing about it, there have been numerous cases in which Israeli citizens have purchased West Bank land with the aid of Arab "front" buyers. However, the obvious risk to the buyer is that he has no proof of ownership.

Amir Elad, a real estate broker who has been active in the sale of West Bank property, said tonight on Israeli television that he expected "many" Arabs to be willing to sell land, although he said he doubted they would want publicity about it. He said the Arab landowners are interested in the "highest bidder."

Naor indicated that the Cabinet considered the possible impact of its decision in light of charges of expansionism often raised by Israel's critics, but that ministers had resolved themselves to opposition.

"From the point of view of hasbara (overseas image-building) we have to be the underdog. But I don't think nasty comments will be justified. The [revoked] law was immoral," Naor said.