Prime Minister Menchem Begin has decided to call for early elections if he is unable to settle a sharp dispute within his Cabinet over the country's failing economy, sources close to the prime minister said today.

Begin has chosen early elections over the other alternative of resigning or allowing the opposition Labor Party to call for a no-confidence vote and bring the government down, the sources said.

The sources said that the prime minister is determined to bring his term of office to an "honorable" end before running again. To do otherwise, he has told his aides, would foster the appearance of having been driven from office by Labor leader Shimon Peres.

Thus, if either Education Minister Zevulun Hammer or Finance Minister Yigael Hurvitz resigns on Sunday -- as expected -- Begin is likely to present a bill in the Knesset (parliament) to schedule a national election no earlier than May 17.

That would be the fourth anniversary of the election victory that brought Begin's Likud government to power. The prime minister would be able to campaign on the achievement of having served out a full four-year term without a dissolution or full-scale reformation of the Cabinet -- something no other Israeli government has done since this nation was founded in 1948.

There are basically three ways Begin's government could collapse:

First, he could go to President Yitzhak Navon and submit his resignation.

Navon could then ask Begin to attempt to form a new government, or he could ask any member of the Knesset to try to form a government. Both options have been chosen in the past.

Or, Begin could simply permit either Hammer or Hurvitz to resign and let them take with them their party colleagues in the Knesset. Hammer's National Religious Party has 12 seats, and Hurvitz's Rafi faction has three. Either combination of defections would be enough to doom Begin's fragile Likud coalition, which can count on only a one-vote majority.

Encouraged by the defections, the Labor Party would be certain to introduce a motion of no-confidence, which, if adopted, would force Begin to submit his resignation.

Finally, Begin can introduce a motion to hold elections no sooner than 100 days. This period is provided to allow Army officers and civil servants time to resign their positions and run for seats.

Begin, according to his aides, is determined to follow this last course, and therefore put the Likud in a better light as the campaign approaches.

Meanwhile, there was no progress today in attempts to mediate a compromise between Hammer and Hurvitz on the differences over a proposed 30 to 60 percnet wage hike for Israel's teachers. Hammer and Hurvitz have both vowed to quit the government -- and take their factions out of the coalition -- if they do not prevail on the salary issue.

Hurvitz, who has been directed by the Cabinet to salvage Israel's inflation-ridden economy with strict economic reforms, has warned that approving increases for the teachers would trigger a flood of demands from other groups. Hammer has warned the rejections of the increases would cause a nationwide school strike.