The Israeli government has lost another round in its long and tenacious campaign to expunge the word Palestine from the lexicon of Arab-Israeli politics.

The military governor of the occupied Gaza Strip has informed the directors of the Bank of Palestine in Gaza that they may reopen for business under the name the bank used before the 1967 war. The bank had been closed, and its assets frozen in Cairo since Israel captured the Gaza Strip from Egypt.

When the military governor last year cleared the way for the bank to reopen, it ordered the directors to change its name, deleting the word Palestine because it was felt that the term would incite nationalistic feelings among Arabs in the occupied territories and endanger Israel's security.

The bank directors petitioned Israel's Supreme Court, charging that the military governor's objections were poltically motivated, and won a temporary injunction requiring Israeli authorities to show cause why the word Palestine should not be permitted. When the time in which to respond elapsed, military governor Brig. Gen. Yitzhak Segev said he was dropping the matter.

Gabriel Levi, spokesman of the Israeli Justice Ministry, said the government gave up the case because the bank acquired its name more than 20 years ago. He said the decision does not necessarily reflect a policy shift with respect to Israeli opposition to new Arab businesses that use Palestine in their names.

It was not the first time the Israeli government had encountered problems striking the offending word -- which described the area that is now Israel in the time of the British Mandate -- from the permissible vocabulary of Arab business names.

Last year, the East Jerusalen Arabic newspaper, Al Fair, successfully fought the military censors over its subtitle, "Palestinian Weekly." The paper's owners, to the embarassment of the censor, pointed out that the Israeli English-language daily, the Jerusalem Post, is listed on its masthead as being owned by the Palestine Post Ltd., name of the newspaper before Israel became independent.

Moreover, the Company Registrar's Office in Israel lists numerous Isareli firms whose names include the taboo word -- Palestine in English or Falastin in Hebrew.

The previous Labor Party government also had problems with the word Palestine, particularly the late prime minister Golda Meir, who once argued forcefully against the use of the term Palestinians to describe Arabs in the West Bank and Gaza Strip. To underline her point, she produced an identity card issued by the British Mandate authorities that described her as a Palestinian.

The problem came up again during the Camp David negotiations, but the Israelis solved it by simply excising the word in the Hebrew translations. Prime Minister Menachem Begin did, however, insist on a side letter in which President Carter noted, "I have been informed that the expression 'West Bank' is understood by the government of Israel to mean 'Judea and Samaria.'" Judea and Samaria are the biblical terms for the West Bank.

Objectionable words continued to haunt Israelis, however, during the autonomy talks when the negotiating teams traveled to Alexandria, Egypt. There, the city's most comfortable and modern hotel is named the Palestine Hotel, and the Israeli delegation, headed by Interior Minister Yosef Burg, refused to stay in it.

Instead, the delegation chose the distinctly fading and aged San Stefano Hotel for the talks, a decision that stimulated Danny Rubenstein, columnist for the Hebrew daily, Davar, to observe the irony that the hotel was named for St. Stephen, an early Christian saint who was stoned by Jews following the death of Jesus.

"In the name of that Christian saint, thousands of Jews have been slaughtered for 2,000 years. The forebears of Dr. Burg, an observant Jew, and all our ancestors, would not have dared to enter such a house bearing the names of the Messiah and his saints," Rubenstein wryly noted in a column.

West Bank and Gaza Arabs, carefully following the ups and downs of Israel's battle against the term Palestine, say they are puzzled -- and amused -- by the intensity of the debate.

"Our bank has always been called the Bank of Palestine," said Hatem Abu Ghazaleh, a Gaza Strip physician and one of the bank's directors. "They made a sacred cow out of the name.It became political to them, and started growing larger and larger in their minds. What is going to be achieved by erasing the name Palestine from a few signs and letterheads? The problem here is larger than just a name," Abu Ghazaleh said in a telephone interview.