Hundreds of Arab students from Bethlehem University took over the town's municipal building for five hours today to protest the beating of two university officials by an armed vigilante squad they said consisted of members of the Israeli-supported village leagues of the West Bank.

The protest followed increasing complaints by West Bank Palestinians that members of the leagues, armed by the Israeli Army ostensibly for self-protection, have been conducting vigilante operations to intimidate opponents and recruit support for the pro-Israeli Arab organization.

Mustafa Dudeen, head of the Hebron region village leagues, denied that his organization was involved in the incident. Israeli Army officials said an investigation was under way.

Bethlehem Mayor Elias Freij and university officials negotiated an end to the siege as Israeli troops surrounded the building and sealed off the town. The students demanded that the Israeli occupation government disarm members of the village leagues, which were created to counter West Bank mayors who openly support the Palestine Liberation Organization.

University officials said five men armed with Israeli submachine guns forced their way onto the campus and severely beat a watchman with the butts of their weapons. The watchman, Farrah Assou, was admitted to the French Hospital in Bethlehem with injuries.

When Brother Albert Alonzo, dean of students and religious superior of the Vatican-supported Arab university, tried to intervene, he was also beaten, university officials said.

Brother Thomas Scanlan, vice chancellor, said he had received on the same day a threatening letter signed by village league leaders accusing the university of opposing the leagues and warning of "dangerous consequences." He said the university had done nothing in opposition to the leagues.

University sources said the armed men were driving a gray jeep similar to those issued to members of the leagues and were carrying Uzi submachine guns, which have been issued to scores of village league members.

Also yesterday, a gang of unidentified armed men broke into the Greek Orthodox men's club in nearby Beir Sahur, beat several members, smashed furniture and shot their weapons in the air, village officials charged. Bethlehem village league leaders denied that their members were involved.

West Bank Palestinian sources complained that armed village league members routinely stop cars and intimidate their occupants and force their way into Arab houses for searches. On March 17, Freij complained to the International Red Cross and the U.N. Relief and Works Agency that armed village league "bodyguards," accompanied by Israeli soldiers, beat up residents of the Dehaishe refugee camp following a rock-throwing disturbance there. Israeli military officials denied the charge.

Earlier today, a dummy bomb wired to a timing device was found at the Al Aqsa mosque in Jerusalem's Old City, with a note warning against Arab opposition to the village leagues. The note bore the name of the league and "The Faithful of the Temple Mount," an extremist Jewish organization that has demanded the right for Jews to pray in the mosque, which is at the site of the second temple of Israel. It is also the third holiest shrine of Islam, after Mecca and Medina.

The Israeli Army began arming and training scores of village league members after Yousef Khatib, league director in Ramallah, was ambushed and shot to death on Nov. 17. On March 12, gunmen opened fire with automatic rifles on the house of Fahri Issa, another Ramallah area league leader, and on March 31, Kamal Satafta, head of the Tarkumiya league, was wounded when a pipe bomb exploded under his car.

Two days after it was disclosed that league members were being armed by the Israeli Army, Jordan issued a military order prohibiting membership in the group and threatening confiscation of property and death penalties against those West Bank Arabs convicted in absentia of treason.

Since then about 50 league members have resigned and the Israeli government announced that if Jordan carries out its threat, it will treat Jordan like a terrorist organization, implying military strikes across the border