Israel, in defiance of mounting international criticism of its settlements in the occupied West Bank of the Jordan River, today expropriated 1,000 acres of Arab land east of Jerusalem in order to close a circle of Jewish suburbs around the city.

Finance Minister Yigael Hurvitz signed the land seizure order, government sources said, putting into effect the first stage of a Jewish settlement expansion plan for 10,000 housing units that has already met stiff opposition from Palestinian leaders and from Jerusalem Mayor Teddy Kollek. o

The proposal, designed to disrupt the brisk pace of Arab construction in the largest gap in the Jewish suburbs forming Jerusalem's periphery and to obviate the possibility of dividing the city in any political settlement, was discussed by the Cabinet Sunday.

The Palestine National Guidance Committee, a group of radical mayors and Arab leaders formed after the Camp David accords were signed, today denounced the housing plan as an "unlawful" aggression by Israel, and Kollek sharply criticized it as a distortion of a development program he proposed several years ago with the aim of benefiting both Jews and Arabs.

The expropriation order, issued today after a Cabinet advisory committee met secertly last night, appears to contradict the spirit -- if not the letter -- of a government policy decision Oct. 14 not to expropriate "one inch" of privately owned Arab land for new settlements.

In that decision, the Cabinet said its policy of seizing only public domain land formerly owned by the Jordanian government would apply to the occupied West Bank and Gaza Strip, but it did not specifically mention East Jerusalem, which was annexed by Israel after it was captured from Arabs in the 1967 war.

Housing Minister David Levy, who is also the sponsor of a plan before the Cabinet to build housing for Jewish settlers in the center of exclusively Arab Hebron on the West Bank, urged that the large tract of land between the East Jerusalem settlemens of Neve Yaacov and French Hill be expropriated.

The government plans to offer to compensate the Arab land owners for the seizure. But in the past the Arabs have refused the payments because they lose title to the land and run the risk of being prosecuted by Jordan for selling land to Israel.

The plan reportedly is similar to one raised under the previous Labor Party government, involving 3,700 to 4,000 acres on the fringe of the Judean Desert to the east of the Arab villages of Beit Hanian and Shuafat. About 1,750 acres of the land belongs to the Arab villages of Hizma and Anata.

The plan would link Neve Yaacov, a sprawling high-rise apartment complex on the Jerusalem-to-ramallah road, to the similiar French Hill project, and thereby tighten the circle of Israeli housing around Jerusalem for strategic and political purposes.

The reasoning of both the Labor and the Likud governments has been that a ring of densely populated Jewish suburbs around Jerusalem would make it impossible to redefine the capital's boundaries in any political compromise with Jordan or the Palestinians.

Levy reportedly warned Cabinet ministers that Arab speculators have stepped up housing construction in the Neve Yaacov gap to drive a wedge in the periphery, and that Israeli counteraction was needed immediately, despite the international opposition that would result.

The Israeli Cabinet has been divided on the settlement issue following the recent U.N. Security Council vote condemning the policy and growing opposition to it from a number of European Economic Community nations. Moderate Cabinet ministers have urged a low profile and no new settlement activity for now, while others, including Levy, are urging a counterattack by announcing amibitious new plans for civilian outposts.

Kollek said today the city repeatedly had sought government approval of a master plan to link Neve Yaacov with the rest of Jerusalem. But he said his proposal called for new housing for both Jews and Arabs and requisitioninng some land that was owned by Jews before Jordan captured the area in the 1948 war.

Kollek said his proposals were never acted on because the government was unwilling to appropriate the money. He said seizing Arab land now would only exacerbate tensions and damage Israel's image abroad.

Meanwhile, the East Jerusalem newspaper, Al Kuds, today said in an editorial that the land involved "is the only remaining strip in the Jerusalem area where Arab compatriots have breathing space," and it condemned Israel for "driving away Arabs to replace them with Jews."