The Israeli government said today it will take over the Arab-owned East Jerusalem Electric Co. -- the largest Palestinian business east of the pre-1967 border -- because the company has failed to provide adequate service either to Arab users or to approximately 15,000 Jewish homes in East Jerusalem.

However, the chairman of the electric company, Anwar Nusseibeh, charged that the planned takeover has "political implications" and demanded the firm be left in Arab hands.

Nusseibeh, former Jordanian defense minister and one of the most prominent former Hashemite officials living under Israeli rule, said, "the problem we face is one of principle. It has political implications, legal implications and implications for our very existence as a people in this country."

He said the company is considering appealing to Israel's supreme court or the International Court of Justice at The Hague. The Israeli government's notice to purchase the franchise after a mandatory year's grace period touched off a storm of protest by East Jerusalem and West Bank Palestinian leaders.

Elias Freij, major of Bethlehem and former chairman of East Jerusalem Electric, condemned the planned takeover, saying, "We are going to raise hell. All the mayors will work in unison to protect this company."

Karim Khalaf, mayor of Ramallah and a member of the East Jerusalem board of directors, said, "it's part of an Israeli plan to get everything in their hands . . . Israel has annexed East Jerusalem and they're trying to make it as de facto as possible."

Israeli Energy Minister Yitzhak Modai said Israel will take over the franchise for "strictly technological and economic reasons," citing the company's relatively small size compared to other power companies and its long history of financial problems and disruptions in service.

Modai said the East Jerusalem firm, whose concession extends for a radius of about 20 miles from the center of the old city and serves 60,000 customers, has shown itself unable to provide efficient and economic service with its oil-fired power plant. He noted the company generates only one-third of its power at its own plant, purchasing the rest of its distribution from the Israel Electric Co. grid.

For years East Jerusalem Electric has been a center of controversy, with Jewish residents of East Jerusalem and the West Bank complaining about power disruptions, poor service and deteriorating relations with the Arab management. Some of the Jewish residents complained that the service was at best incompetent and they frequently cited the security risk of having an Arab company control power in isolated border neighborhoods.

The company supplies power to the Jewish quarter of the old city and to outlying areas of East Jerusalem, including military bases.

The Arab management charged the government with harassment and the constant threat of a takeover and said the complaints were exaggerated.

Nusseibeh said that even though Palestinians consider Jewish settlements in East Jerusalem and the West Bank illegal under international law, the company agreed to supply electricity to them because it regarded the firm's economic survival as paramount.

The company long has been subsidized by Arab funds channeled through Jordan, and a joint Jordanian-Palestine Liberation Organization committee on the occupied territories approved major decisions by East Jerusalem Electric's board.

Yitzhak Shomron, an Israeli Energy Ministry spokesman, said "the whole trend in the world is toward the integration of small electrical systems. This is a fact that everybody recognizes."

He stressed that the 400 Arab workers for the firm had been notified that their jobs will be "secure according to Israeli law."