Saudi Arabia announced today that it is breaking diplomatic relations with Libya in retaliation for a spate of vicious attacks by Libyan leader Muammar Qaddafi on American assistance to the Saudis.

Qaddafi has publicly assailed the Saudi decision to call for American help in defending its vulnerable oil fields against possible Iranian assault during the Persian Gulf war.

The announcement, made over Riyadh radio and monitored here, comes amid growing, intra-Arab strains and shifting alliances stemming from the five-week-old war between Iran and Iraq.

It highlights the deepening bitter divisions within the Arab world over the war and seems likely to place in jeopardy the already contested plan for an Arab summit in mid-November in Amman, Jordan, that is scheduled to discuss a possible Arab initiative to replace the stalled Camp David peace negotiations.

Western observers here said the rupture between radical Libya and conservative Saudi Arabia could also lay the groundwork for other dramatic changes in the Arab would later, such as a possible repprochement between Riyadh and Cairo repairing the split arising from Saudi opposition to the Camp David accords.

The Saudi state radio said the kingdom's decision to sever ties with Libya was taken because Libyan attacks had "exceeded all limits extending to the Moslem faith itself. This could no longer be tolerated. We cannot remain silent."

Libya had no immediate reaction.

The break came eight days after Qaddafi first publicly blasted Saudi Arabia for using American military radar reconnaissance planes for defense and called on the 2 million pilgrims to the Moslem holy shrines there "to engage in a holy war to liberate Mecca."

Qaddafi's charges that "Mecca, the holy Kaaba, Medina, the prophet's tomb and Mount Arafat are in effect occupied by America" infuriated the Saudis and set loose a torrent of charges between the two countries, already long at odds with each other over a host of issues.

In reply, King Khalid called Qaddafi a "spearhead against Islam and its sanctities" and accused him of wanting to deprive Saudi Arabia of all means of defense" so that it could be swallowed by the communist and Zionist enemies of Islam."

Subsequently, Saudi religious leaders have been demanding the virtual excommunication of Qaddafi from the Islamic world as a heretic, while Libyan propaganda has branded Saudi Arabia as an agent of the "American imperialist offensive" in the Arab world.

Whether the feud between Libya and Saudi Arabia will now embroil their respective allies, polarizing the Arab world between its American supported conservative wing and Soviet-backed radical one, remains to be seen. But the prospect seems increasingly likely.

One unanswered question tonight was whether Saudi Arabia would also proceed to cut its relations with Syria, which has agreed to a merger with Libya into a single state and has just signed a treaty of friendship and cooperation with Moscow.

Syria has been heavily dependent on Saudi financial aid for the past two years to balance its budget in the face of heavy defense expenditures needed to continue its policy of confrontation with Isreal.

While Qaddafi and Syrian President Hafez Assad agreed Sept. 10 to a merger, requiring one executive, one foreign policy and one Army, they have delayed steps to implement their accord. Qaddafi was supposed to have arrived in Damascus today for discussions on the unity plan but canceled his trip at the last minute, possibly because he was aware of the crisis brewing in Libya's relations with Saudi Arabia.

The break in Libyan-Saudi relations is certain to please Egypt. President Anwar Sadat has also been under bitter attack from Qaddafi since he signed the Camp David peace accord with Israel.

The Egyptian press has been following closely Qaddafi's attacks on Saudi Arabia.

The Libyan leader also has accused Sadat of selling out to "American imperialism" by inviting the United States to make use of Egyptian military facilities to help defend the West's oil lanes in the gulf from communist or any other threat.

With Saudi Arabia and Egypt at odds with Libya over basically the same issue, their military links with Washington, Egyptian officials are hopeful the Saudis will see the military and political advantages of a rapprochement.

"The Saudis are repeating the same thing we said about Qaddafi two or three years ago," said one Egyptian with evident satisfaction about the souring in Libyan-Saudi relations.

Asked about the prospects for a rapprochement, he said, "We cannot take the initiative. They [the Saudis] broke relations and they should take the initiative to have one."

Saudi Arabia broke diplomatic relations with Egypt immediately after it signed the Camp David accords in September 1978. But it has kept a large interests section within the Pakistani Embassy headed by a minister plenipotentiary.