It has been three months since the Palestine Liberation Organization guerrillas left Beirut, but there is no end in sight to the Israeli occupation of southern Lebanon and no beginning in sight of the negotiations to arrange a troop withdrawal.

The Israeli Cabinet's decision yesterday to insist that the negotiations with Lebanon take place in the capital cities of Beirut and Jerusalem is the latest complication to the efforts by U.S. envoys Philip C. Habib and Morris Draper to get the talks started.

Jerusalem is a city holy to religion and troublesome to diplomacy. Since capturing East Jerusalem from Jordan in the 1967 war, Israel has maintained that the unified city is its "eternal capital," a claim that is not officially recognized by its best friend among nations, the United States, let alone by its Arab enemies.

The issue of Jerusalem's future is so intractable it was not seriously raised at the Camp David peace conference, but, along with the other most difficult issues, was shunted aside for future consideration. This made possible the more limited goal of an Egyptian-Israeli peace treaty.

When the stalled Camp David autonomy talks were broken off last spring, the issue that caused the open breach was Israel's charge that Egypt was "boycotting" its capital by refusing to discuss Palestinian autonomy in Jerusalem.

Now Jerusalem is a central issue in simply beginning the proposed new negotiations on the withdrawal of Israeli, Syrian and Palestinian forces from Lebanon.

It seems highly unlikely that Lebanese President Amin Gemayel, still struggling to consolidate his hold on the divided and war-ravaged country, will be willing to antagonize the other Arab countries of the region by agreeing to negotiate with the Israelis in Jerusalem. But according to a number of accounts in the Israeli press today, when this and other arguments for greater flexibility were made during the Cabinet meeting, it was Prime Minister Menachem Begin who was most adamant on the issue.

"There can be no concession on Jerusalem," Begin was quoted as saying.

The other issue that has blocked the start of the troop withdrawal negotiations has been the level and makeup of the Lebanese and Israeli negotiating teams. On this issue, the Cabinet dropped its demand that Cabinet ministers from Israel and Lebanon face each other across the negotiating table, while still insisting that the negotiating teams be headed by "properly authorized civilians," and not military officers.

However, this concession, described as "forthcoming" by Israeli officials, does not appear to be nearly enough to persuade Lebanon to compromise on the emotional issue of Jerusalem.

Behind the apparently strong Israeli stands on these two procedural issues is the much diminished but still lingering hope that out of war in Lebanon somehow there can come formal peace with Lebanon.

That hope flourished in Israel during the brief period between the election of Bashir Gemayel as president of Lebanon and his assassination on Sept. 14. Bashir Gemayel, commander of the Israeli-supplied Christian Phalangist militia, was seen as Israel's best friend north of the border.

Yet before his death, even Bashir was resisting the public pressure by Begin and others to reach a speedy peace agreement with Israel. His brother and successor, Amin, is even more reticent about appearing to draw closer to Israel while attempting to impose central authority on a country with a majority Moslem population.

Israeli officials have gradually come to acknowledge Amin Gemayel's precarious position and to lower their expectations for a peace treaty. But they have not entirely given up the hope that the troop withdrawal negotiations, if properly structured, will lead to more than the exit of Israeli, Syrian and Palestinian forces from Lebanon.

"We want the talks to lead to normalization," an Israeli official said. "We don't want just a cease-fire."

With this goal still in mind, Israeli officials said they were encouraged by a statement yesterday by Fady Frem, Bashir Gemayel's successor as commander of the Phalangist militia, urging the Lebanese government "to join the peace process now." But the Lebanese Christians have long had ties to Israel and are but one faction that Amin Gemayel must contend with in seeking the withdrawal of foreign forces from the country.

Meanwhile, there are now two American diplomats roaming the Middle East, trying to help the peace process along. Habib, the senior partner, was in Cairo for talks with Egyptian officials. It was left to Draper to deliver the Israeli Cabinet's positions to Beirut, where, according to Lebanese radio, they were expected to be rejected.