A team of Israeli diplomats flew to Cario today to open the Jewish state's first embassy in the Arab world, a significant milestone in steadily progressing peaceful relations between Eqypt and its former enemy.

The new Israeli Embassy provides a dramatic reminder both of the distance traveled since President Anwar Sadat made his startling journey to Jerusalem in November 1977 and of the continuing advances in normalization of bilateral Egyptian-Israeli relations despite fundamental and often bitter discord over the future of the Israeli-occupied West Bank and Gaza.

Beneath the bombast of Eqyptian protests over Israeli settlements and despite rough going in Palestinian autonomy talks, Sadat has been careful to carry out to the letter and spirit of his treaty commitments to open a new era of normal relations with Israel.In return, it is rumored here that Israel might be persuaded to relinguish the remaining third of the Sinai it still occupies ahead of treaty schedule, which calls for it to be turned over in April 1981.

In the meantime, Sadat has gained Israeli favor by naming his defense minister, Gen. Kamal Hassan Ali, as head of the Egyptian team negotiating steps to establish normal relations with the Israelis. Officially, Ali was named because military arrangements in the Sinai are an important part of the process and his Israeli counterpart, Defense Minister Ezer Weizman, also is a military man.

The choice was interpreted as a signal of good will, however, because the rotund defense minister is known for his flexibility and good humor, while the man he replaced, Minister of State for Foreign Affairs Butros Ghali, is known for his determination to make the Israelis pay for normalization with concessions in the antonomy talks.

The Israeli flag, which is scheduled to be raised over the Cairo embassy in a little ceremony Monday, will become a highly visable signal that Sadat is resolved instead to push ahead on normalization despite the slow pace of autonomy negotiations.

Another sign in that direction is the swift formation by Ali and Weizman of committees to work out practical details of normal relations. The March 26 peace treaty provided for a six-month period for normalization talks, beginning with the opening of diplomatic relations Jan 25. Ali said last week, however, that task forces on sea and land transport, tourism postage and communications expect to wind up their work by the end of this month and that two more -- on cooperation in science and culture and in agriculture -- will be formed by that time.

Direct air links are scheduled to begin during the first week of March, with two flights a week by the Israeli national airline El Al and two a week by an Egyptian airline being formed specially for the Tel Aviv-Cario run.

The Egyptian government is organizing the new company -- Lotus Airlines -- to avoid having to send Egyptair, Egypt's national carrier, on regular flights to Israel. Officials fear this could prompt other Arab nations to carry out their threats to boycott Egyptian planes and cut off flights to Cario.

Although the Arab nations decided in principle on such a boycott last year in fact only Iraq and Syria have suspended service and barred their airports to Egyptain planes. Saudi, Kuwaiti, Jordanian, Lebanese and Arab emirates planes land and take off regularly from Cario, most of them jammed with passagers.

Travel between Egypt and Israel has been possible by land since late last month through a gate at El Arish, an Egyptian town on the Mediterranean that marks the northern end of the temporary frontier along a line running to Ras Muhammad at the southern tip of the Sinai. Prior visas remain necessary, however, making casual tourism impossible.

Israeli officials say more than 2,000 Israelis have received tourist visas from Cario out of about 2,500 who have applied in the last year. Only a few Egyptians, most of them Jews visiting relatives, have asked to visit Israel, they say.

The Israelis who arrived today, two diplomats and several administrative assistants, are headed by Yosef Haddas. An Arabic-speaking Iraqi Jew who is a veteran in the Israeli Foreign Ministry, Haddas will be the embassy's number two diplomat under the ambassador-designate, Eliahu Ben-Elissar.

As embassies go here, the Israeli chancery is not much to look at -- a beige two-story villa in a grade B Cario neighborhood called Dokki that in the last few days has received a sudden infusion of Egyptain security agents standing around with their hands in the pockets of dusty black greatcoats.

The modest villa housing the embassy is only temporary, rented for lack of what the Israelis really wanted. An Israeli advance team recently scoured Cairo's prestigious downtown neighborhoods unsuccessfully for the top floors of an apartment building, considering that the best arrangement for maximum security, according to sources familiar with the search.

They were unable to find what they wanted, however, chiefly because landlords refused to rent to them on grounds that security precautions and the risk of terror attacks made them a bad risk as tenants, the sources said. One deal was almost closed for such an arrangement, they added, until the owner, a Palestinian, found out who the tenants would be and cabled a firm "no" from his residence abroad.

Ben-Elissar, who has been a top aide to Prime Minister Menachem Begin, is expected to join his staff in the temporary quarters next week and present his credentials to Sadat on Feb. 26 simultaneously with several other new ambassadors.

Egypt's ambassador-designate to Israel, Saad Murtada, is to present his credentials to Israeli President Yitzhak Navron the same day in Jerusalem. Underlining the continued disagreement over West Bank autonomy, Egyptian officials said Murtada will hand the Israelis along with his credentials a note specifying that Egypt refuses to recognize Israel's annexation of Arab East Jerusalem.