Following pressure from Arab states described as "unprecedented by Ottawa standards," the government of Prime Minister Joe Clark today publicly abandoned its contraversial plan to move the Canadian Embassy in ISRAEL FROM tel Aviv to Jerusalem.

An embarrassed Clark announced the reversal of his election pledge in a brief statement, saying that the plan was seen "as prejudicing" Middle East peace talks. He said that Canada would take "no action until the status of Jerusalem is clarified within a comprehensive agreement between Israel and its Arab neighbors."

His announmcement followed cancelations by Arab purchasers of three contracts with Canadian businesses worth $4.5 million accompanied by threats of more drastic retaliatory measures against Canadian interests in the Middle East. One of the endangered deals is a multibillion-dollar project involving Bell Canada investments in Saudi Arabia.

Clark, who promised during the election campaign last spring that Canada would move its embassy in Israel, quietly shelved the project after an uproar in the Arab capitals.

Saudi Arabia, however, is reliably reported to have insisted that the 40-year-old Conservative prime ministerannounced his reversal publicly.

The concerted Arab pressure began immediately after Clark defeated incumbent Liberal leader Pierre. Trudeau in the May 22 elections, and formed the first Conservative government here in 16 years.

In his first press conference, after the election Clark reaffirmed his intention to move the Canadian Embassy to Jerusaalem, which Israel considers its capital. All ambassadors, whose governments are disputing Israel's control of the holy city, jointly protested to the new Secretary of State for External Affairs Flora McDonald and threatened retaliatory measures.

Things were made worse when a Clark stalwart, Minister for Manpower and Immigration Ronald Atkey, publicly berated the Arabs, saying, "their bark was worse than their bite."

To take the heat off, Clark appointed the Conservative politician and former Cabinet minister Robert Stanfied to study the matter and present a report to the government.

The Stanfield appointment was designed to signal the Arabs that the issue was being shelved. It was expected that -- known to have regarded the original pledge as foolish -- would present a report next spring counseling that the move idea be dropped.

But many Arab governments -- led by the Saudis -- viewed the issue as too potentially dangerous to wait.

In insisting that Clark renege on his campaign promise, the Saudis were indirectly supported by many Canadian businessmen who saw their Middle East contracts endangered at a time of economic slowdown in Canada. Even Canadian Jewish leaders were divided on the issue.

Last week International Trade Minister Michael Wilson announced that Saudi Arabia, Iraw and Libya had taken the first concrete steps toward retaliation by canceling trade agreements. He expressed deep concern over the "commercial implications" of these measures.

The largest contract canceled was a $4.2 million lumber sale to Iraq, part of a $12 million deal involving an unidentified Canadian company.

In announcing his decision today, Clark said that the results of Stanfield's recent fact-finding trip to seven Middle Eastern countries have shown that Canada's attempts "to promote peace in the area" would be undermined by the embassy plan.

"The purpose of this government is to encourage peace," Clark said before the House of Commons. "Consequently the government accepted the recommendation [by Stanfield] that no action be taken on the location of the Canadian Enbassy in Israel until the status of Jerusalem is clarified within a comprehensive agreement between Israel and its Arab neighbors."

Ever since Clark promised to move the embassy in the final weeks of last spring's election campaign, opposition has built within Canada to the promise. s