Bowing to congressional protests, the State Department moved yesterday to stop Boeing Co. from selling passenger jets worth $208 million to Iraq.

State said it was recommending to the Commerce Department that no export license for the planes be issued to Boeing because of "Iraqi involvement" in recent terrorism.

Although technically State's recommendation is not binding on Commerce, the action represents a Carter administration decision to stop sale of two Boeing 747 jumbo jets and three smaller 727 passenger liners to Iraqi Airways.

However, an earlier controversial transaction under which General Electric engines were sold to Italy to power frigates being built for the Iraqi Navy still stands.

"In view of recent terrorist incidents which appear to have had Iraqi involvement or support," State said in a formal explanation, "and the clear sentiment of the Congress with respect to international terrorism, we have advised the American aircraft manufacturers involved" that it cannot recommend issuance of the export licenses.

The ruling apparently was prompted by two separate European incidents. Two Iraqi diplomats have been accused of passing explosives to people in West Berlin who planned to use them against Kirdish dissidents. In Vienna, two diplomats were arrested and expelled for trying to blow up the Iranian Embassy.

Iraq is on the State Department's list of countries allegedly encouraging terrorism. Others are Libya, South Yemen and Syria.

The Carter administration is on the defensive about selling American technology to radical regimes. The congressional probe of Billy Carter's dealings with Libya and the engine sale for Iraqi frigates are two political storm centers this election year.

Israel had opposed the aircraft sales to Iraq. Congressional critics had said the Boeing jets eventually could be used to transport Iraqi troops as well as civilians.

Rep. Millicent Fenwick (R-N.J.), a chief congressional critic of the plane deal and author of legislation requiring the administration to notify Congress of such transactions, praised yesterday's decision in a letter to Secretary of State Edmund S. Muskie.

"Our national commitment against terrorism and those countries which support terrorism is greatly reinforced by this action," she wrote.

Sources said State reached its decision on the planes at a Thursday meeting of Mideast experts.

Earlier this month, State announced it was going along with Commerce's approval of the sale of eight General Electric turbine engines, worth $11.2 million, for four Italian Lupo class frigates ordered by Iraq.

"We concluded that it would not be in our overall foreign policy interest to revoke this export license," State said at the time.

Congressional sources said State has asserted that going through with this engine deal gives the United States leverage to limit Italy's sales of nuclear power plant hardware to Iraq.

The frigate sales to Iraqi are part of a military deal worth about $1 billion to Italy.

The Senate voted to block the engine sales, but the House has not acted.