The Israeli Cabinet, plunged into crisis by the massacre of Palestinian refugees in Israeli-occupied West Beirut, met behind police barricades at the home of Prime Minister Menachem Begin last night to decide its next move as its forces began relinquishing some of their positions in Beirut to the Lebanese Army.

After the 3 1/2-hour meeting, the Cabinet issued a defiant statement this morning rejecting any Israeli responsibility for the slaughter of civilians in Beirut and calling on the people of Israel "to unite around its democratically elected government in its struggle for security and peace" for the country.

The unanimously adopted statement, read to reporters by the Cabinet secretary, Dan Meridor, said it was a "blood libel" to suggest that the Israeli Army that ringed the refugee neighborhoods did anything but intervene to halt the massacre.

Angry protests broke out in Israel yesterday as the scope of the massacre became known, and police used tear gas to break up a demonstration at Begin's Jerusalem home by several hundred opponents of the Israeli invasion of Beirut.

In Cairo, Egyptian Foreign Minister Kamal Hassan Ali threatened to recall Egypt's ambassador from Israel to protest the mass killings. Egypt is the only Arab country with diplomatic ties to Israel.

[Reuter quoted Israeli radio as saying the Cabinet also decided to accept U.N. observers in Beirut and continue the withdrawal of Israeli forces from the city.]

The Cabinet meeting -- called by Begin to consider, among other things, a renewed demand by the United States for an immediate Israeli withdrawal from Beirut -- came as Lebanese government troops took control of the Shatila and Sabra refugee camps and, with Red Cross workers, began the task of recovering the bodies of victims of the Friday rampage by Lebanese Christian militias.

As of late last night there still was no clear casualty figure, but people who had visited the demolished camps estimated that the dead numbered in the hundreds. Palestinian officials put the number as high as 1,800.

Israeli forces kept control yesterday of the Moslem sector of West Beirut, which they occupied Wednesday, a day after the assassination of Lebanese president-elect Bashir Gemayel, and they imposed a strict 5 p.m.-to-5 a.m. curfew.

The Israeli military command announced that the Lebanese Army units, acting in coordination with the Israeli Army, had begun to take up positions in the Shatila and Sabra refugee areas and that Israeli forces that had encircled the refugee area in the southern outskirts of Beirut were being thinned out.

Meanwhile, the military chief of staff, Gen. Rafael Eitan, said in a radio interview that in the days leading up to the mass killings Israeli authorities had been hindered in their efforts to make direct contact with the Lebanese Army, suggesting that such direct contacts might have persuaded the Lebanese Army to enter the refugee neighborhoods to prevent the rampage by the militiamen.

Israeli radio said Eitan was referring to U.S. envoy Morris Draper and Lebanese Prime Minister Shafiq Wazzan, but there was no elaboration on the accusation.

News of the massacre burst over Israel in the midst of the two-day Rosh Hashanah holiday marking the beginning of the Jewish new year. In Jerusalem yesterday, many Israelis strolled the streets enjoying a splendid late-summer day, seemingly unaware of or unconcerned about the events that had taken place in Beirut.

But there were also indications that the massacre of the Palestinian refugees while the Israeli Army was nearby could erupt into a major political crisis for the Begin government, which has been riding high since the defeat of the Palestine Liberation Organization in Lebanon forced the evacuation of most of the PLO fighters from Beirut.

Newspapers did not publish in Israel over the weekend because of the holiday, but the independent newspaper Haaretz was to publish an editorial Monday calling first for the ouster of Defense Minister Ariel Sharon, to be followed by the resignation of the Begin government and the convening of a national board of inquiry into Israeli complicity in the bloody events of Friday.

The independent newspaper Maariv, which generally supports the Begin government, also was to call for Sharon's dismissal and the convening of a board of inquiry in an editorial to be published Monday.

Last night, a heavy traffic jam was reported along the main coastal road leading south from Haifa to Tel Aviv because of demonstrations along the road by nearby kibbutz residents to protest the massacre. There was also a demonstration reported along Israel's northern border with Lebanon.

The barricades that blocked off access to Begin's home in the center of Jerusalem were thrown up yesterday morning as several hundred demonstrators organized by the opposition Labor Party and Israel's "Peace Now" organization marched into the prime minister's neighborhood.

The protestors got to within 50 yards of Begin's house when they were stopped by police. Some of the demonstrators sat in the middle of an intersection chanting, "Begin is a murderer," and "Fascism will not take over." Others carried signs saying, "Shame" and, "Your hand drips with blood."

After appeals to the crowd to move back failed, police fired three or four bursts of tear gas from a hose at the demonstrators, driving them back to a square around the corner from Begin's home. Seven persons were arrested, but they were freed after questioning.

Several of the demonstrators also reportedly got into angry arguments with other Israelis who were leaving Rosh Hashanah services at nearby synagogues.

At the end of the demonstration, which was attended by several opposition members of the Israeli Knesset (parliament), the protesters sang a slow, sad rendition of the Israeli national anthem. Several uniformed police officers who an hour earlier had directed the tear-gas fire at the crowd stood at attention saluting during the singing.