Israel intensified its war of nerves against Palestinian guerrillas in southern Lebanon today as Army Chief of Staff Rafael Eitan confirmed a buildup of armed forces in northern Israel.

Although the frontier remained quiet and there was no outward sign of troop concentrations on the border itself, the rhetoric from Israeli leaders sharpened considerably in an apparent effort to apply psychological pressure on the Palestine Liberation Organization to forestall violations of the July 1981 cease-fire.

In an interview with the Hebrew daily newspaper Yediot Aharonot, Eitan said, "The terrorists now know that the price is liable to be high, because I concentrated forces in the north."

Although Eitan stressed that his warning does not mean that military action in Lebanon is imminent, he said, "We must decide what steps to take after examining whether or not there is an alternative. Will we gain our end without fighting the terrorists? In my opinion, there isn't any alternative, because the terrorists are at war with us the world over."

Eitan said the Army had been "sitting and preparing" in the north for two weeks or more.

His statement was unusual because Israeli civilian and military officials rarely discuss troop deployments at any time, much less so when military action across the border seems possible. Reports have been published in the Israeli press, despite normally tight censorship restrictions, that two Israeli armored infantry divisions have been redeployed in northern Israel because of the border tensions.

Eitan said the Palestinian guerrillas were "down on their knees" last summer but were saved by the cease-fire arranged by U.S. special envoy Philip C. Habib. Since then, the chief of staff said, the PLO has repeatedly violated the cease-fire.

"It is a fact that there is no cease-fire," Eitan said. "The terrorists say . . . . 'you won't shoot at us in Lebanon, but we will set off explosives in Jerusalem.' That is an honorable cease-fire in their eyes. I don't buy that."

Prime Minister Menachem Begin, in a meeting with Italian Foreign Minister Emilio Colombo, also spelled out Israel's concern about the cease-fire, aides to the prime minister said. Begin reportedly told Colombo that Israel and the United States do not accept the PLO interpretation that the cease-fire applies only to the Israeli-Lebanese border.

Meanwhile, an eight-pound time bomb, which police sappers said would have caused heavy civilian casualties, was discovered in a telephone booth in a busy Jerusalem street today and defused only minutes before it was timed to explode. Police said a passerby spotted the bomb and telephoned authorities.