A Saudi Arabian sheik who was arrested here Christmas Eve after he allegedly offered to sell a $1.2 million stolen ring to undercover FBI agents working an international sting operation was released from D.C. jail yesterday after hiring a former Watergate prosecutor to defend him.

Sheik Allal al-Fassi, 21, whose in-laws are members of the Saudi royal family, was arraigned in D.C. Superior Court and charged with international transportation of stolen goods, a felony punishable by as much as 10 years in prison or a $10,000 fine. D.C. Superior Court Judge Frank Schwelb released al-Fassi on $25,000 bond and ordered him to remain in the Washington area until a federal hearing Monday morning. Al-Fassi does not have diplomatic immunity, a State Department spokesman said.

The sheik is the brother of 28-year-old Sheik Mohammed al-Fassi, who lived in Florida until recently and became the source of some embarrassment to the royal family for his widely publicized marital problems, lavish spending and an initial failure to pay a $1 million bill at the Diplomat Hotel in Hollywood, Fla. There were unconfirmed reports yesterday that Mohammed al-Fassi had returned to Saudi Arabia on orders from the Saudi government, and that a directive was issued to Allal al-Fassi to return home by Monday.

The young sheik's attorney, former Watergate prosecutor Richard Ben-Veniste, described his client yesterday as a "self-employed businessman and investor" who had been "invited" to the United States last week by an undercover FBI agent "to discuss some merchandise." The sheik gave a Florida address and said he had lived in the United States on and off for two years, during which time he had been a student at American University. Court records described him as "unemployed" and said his sole source of income was his family.

"Apparently this was an undercover sting operation," said Ben-Veniste, who is a friend of al-Fassi's royal in-laws and was asked by his family to defend him.

"Surprisingly, this time they the FBI agents were not dressed like sheiks," he said, in mock reference to an FBI case known as Abscam, in which seven congressmen took illegal payoffs from agents who had posed as Arab sheiks. Ben-Veniste refused to discuss the substance of the al-Fassi case. The slightly built, mustachioed sheik, dressed in a dark blue suit and sport shirt, was silent when he left the courthouse shortly after noon yesterday.

The arrest of the younger al-Fassi at the Washington Hilton Hotel on Christmas Eve, hours after he had flown to the United States from Paris, culminated a transcontinental FBI sting operation that began last April when a Swiss jewel dealer discovered a valuable emerald-and-diamond ring missing from his display cases after a private showing of rare jewels for members of the Saudi royal family.

According to court records, Albano Bochatay, the director of the European branch of Harry Winston Inc., a jewelry firm on Fifth Avenue in New York, flew from Geneva to Florida last April to conduct a showing of expensive jewelry at the home of 49-year-old Prince Turki Bin Abdul Azziz, who is married to al-Fassi's sister.

Many people attended the showing, according to an FBI report, and the jewels were passed around among interested buyers. The showing ended at 1 a.m. and Bochatay gathered his jewels and display cases and left.

The next morning, court records say, Bochatay discovered that the gold ring, which was set with a 22.7-carat square emerald and 21 round diamonds and valued at about $1.2 million, was missing. Failing to find the ring, Bochatay contacted the president of his firm, Ronald Winston, who then provided the FBI with photos of the missing jewel.

On Christmas Eve, nearly eight months after the theft was first reported, FBI special agent Michael R. Hartman met the sheik at the Washington Hilton, according to court records. Al-Fassi told Hartman he had flown in from Paris that morning, via New York, and had brought with him a ring that he was willing to sell for $350,000 to $370,000.

Hartman, in his affadavit, said he was sure the ring was the one stolen from the Winston firm because of its unique design and because "it matched in every detail." Hartman said al-Fassi told him he had no bill of sale or proof of ownership.

Hartman and other agents then identified themselves to al-Fassi and confiscated the ring. After his arrest, the sheik maintained that he bought the ring in London and added that he had paid $500,000 for it. Ben-Veniste said the sheik will enter a plea of not guilty in court Monday.