Israel's government declared today that there is "no impediment" to Jewish civilian settlers moving into this exclusively Arab city in the occupied West Bank, although it postponed a decision on when they will start. o

The Cabinet did not characterize it as such, but today's decision set the stage for a fundamental shift in Israel's settlement policy in the West Bank that appeared to have far-reaching political implications both in Israel and abroad.

The government long has defended the right of Jewish settlers to live anywhere in the West Bank and Gaza Strip, both seized in the 1967 Middle East war. But in practice the military governors of the occupied territories have prohibited settlement in areas populated by Arabs.

As a consequence, the approximately 100 Jewish settlements in the West Bank and Gaza are in sparsely populated areas -- with the exception of one illegal sit-in protest by seven families in a former Jewish clinic in downtown Hebron.

The ultranationalist settlement movement, Gush Emunim (Faith Bloc), has been pressing Prime Minister Menachem Begin to reverse the policy in the military-ruled occupied areas and agree to Jews settling in such West Bank cities as Nablus, Ramallah and Hebron.

Pressure intensified following the slaying 10 days ago of a 23-year-old Jewish religious student, Jehoshua Sloma, who was shot twice at point-blank range while walking unarmed through the teeming casbah district of this city of 50,000, the West Bank's second largest.

Central Hebron has been an Army-enforced curfew since the slaying while security forces have conducted house-to-house searches for suspects. The assailant was described as an Arab youth wearing a headdress that covered his face.

The military occupation government lifted the curfew tonight, ending 10 days of restraints in which Arabs were allowed out of their houses only for limited periods each day to shop for essential goods.

Referring to Sloma as a "martyr," Jewish residents of Kiryat Arba, the sprawling settlement on the outskirts of Hebron, marched to the ancient Tomb of the Patriarchs and helded a memorial service. Later, they gathered at the 400-year-old Avraham Avinu synagogue and issued a proclamation declaring central Hebron open to Jewish settlement.

The settlers said they have given the government a list of 56 buildings in Hebron that were Jewish-owned before Arab riots in 1929 that left 67 Jews dead. Gush Emunim leaders said that once these houses are occupied, Jews will begin to buy Arab-owned houses.

"This murder apparently woke somebody up in the government and we're getting approval for living in the city," said Hanna Idles, a Kiryat Arba resident. "The murder has given a jumping-off point to the government to say, 'Look, we have to allow Jews to move back to their homeland in Hebron,'" Idles said.

Critics of Jewish settlement in Arab cities in the West Bank contend that it will exacerbate tensions between Arabs and Jews and force the Israeli Army to maintain a constant guard to prevent clashes that could lead to a blood feud.

Rabbi Moshe Levinger, who is leading Kiryat Arba settlers in the return-to-Hebron movement, argues that the opposite is true, that reluctance to settle in West Bank cities would be interpreted by Arabs as a sign of weakness.

"If they see we are afraid to live here, the nationalist spirit will grow. If we move here, they will see it is not easy to kill Jews," Levinger said in an interview. Asked what will happen if the settlers are not given constant Army protection, he replied, "If the Army leaves, they [the Arabs] will kill us."

While some Kiryat Arba residents interpreted today's Cabinet decision as a victory, Levinger complained that the government was "stuttering" on the issue and said it should immediately approve Jewish settlement of specific houses in Hebron.

Levinger's wife Miriam, who with six other women and their children is squatting in the old Hadassah clinic here, said she anticipates a "very big Jewish population in Hebron, "the more the better." Like other settlers, she based her claim on a historical Jewish attachment to Hebron dating back to King David.

Although the women were ordered out 10 months ago, and Begin declared that such illegal demonstrations would not be tolerated, the government has done nothing to remove them. Instead, the Army is assisting the women by supplying water and the government has refurbished part of the clinic to make the women comfortable.

Critics of the government have accused Begin of allowing the women to "establish the fact" of their presence, as the former Labor Party government did in 1968 when the original Kiryat Arba settlers squatted on the site where the high-rise apartment complex for 550 families now stands.

Meir Indor, a Gush Emunim leader, took several reporters on a tour of former Jewish homes in the crowded casbah, pointing out chisled Stars of David and other evidence of ownership before the 1929 massacre, when all 200 Jewish families fled Hebron.

Indor said Arabs have not moved into many of the houses because of a superstitious belief that they are haunted by the ghosts of the massacre victims.

Hebron Mayor Fahd Kawasma, however, said in an interview that he would welcome the return of Jews to Jewish-owned houses here if Israel allows Palestinians to return to their former homes in Arab towns in Israel proper, such as Haifa, Lod and Ramla.

"Why should there be a double standard? It they have a right to be back here, we have a right to live in our homes too," Kawasma said.

The Israeli response to that assertion is that Arabs fled their homes during the 1948 war not because of Jewish force but because they were urged to leave by the Arab Legion, which promised to conquer the Jewish state and bring the refugees back.