The Israeli Cabinet today formally approved the transfer of Defense Minister Ariel Sharon's responsibilities to Prime Minister Menachem Begin while retaining Sharon in the Cabinet, and senior government officials expressed confidence that parliament would endorse the move.

The switch in responsibilities left Sharon as a minister without portfolio in the Cabinet despite his condemnation by the Israeli commission that investigated the Beirut massacre of Palestinian refugees. The change was expected to be considered on Monday by the Knesset, or parliament, where the Begin government's coalition holds a four-seat majority, and the Cabinet did not anticipate any problem.

"There may be one or two abstentions at worst," said Deputy Foreign Minister Yehuda Ben-Meir following the Cabinet meeting.

Under Israeli law, Sharon will remain defense minister until the Knesset approves the transfer of authority to Begin. In a letter handed to the prime minister today, Sharon carefully did not resign from the post but said he would "honor" the Cabinet's decision Thursday to adopt the recommendation of the inquiry commission "to transfer the post of defense minister from me."

"I would like to make it clear that I have no intention of resigning from the Cabinet and will continue to serve in it as a minister," Sharon said in the letter.

The Cabinet's decision and anticipated Knesset approval appeared to represent almost a victory for Sharon and was the most that he could have hoped to salvage after release of the commission's report last week. The 108-page document accused him of the "grave mistake" and "blunders" that led directly to last September's massacre of hundreds of Palestinian refugees in West Beirut by militiamen of Israel's ally, the Christian Lebanese Forces linked to the Phalangist Party.

A far more powerful personality than most other members of the Cabinet, Sharon will remain a part of the government's executive body and a hero to many of his countrymen.

Dan Meridor, the Cabinet secretary, said Begin does not want to hold the dual responsibilities of prime minister and defense minister for long and predicted that he would soon find a permanent replacement for Sharon. A senior official confirmed after the meeting that Moshe Arens, the Israeli ambassador to the United States, is Begin's first choice for the job, but he refused to speculate on the likelihood that Arens would accept the position.

Arens, interviewed on the NBC television program "Meet the Press," refused to discuss speculation that he might become defense minister or that he is reluctant to take the job if Sharon remains in the Cabinet. While saying he would not answer "hypothetical questions," he noted that he knew of no past instance in Israeli politics when someone has made his acceptance of a Cabinet post "conditional on someone else not being there."

The meeting in Begin's office took place while nearby a small group from Israel's Peace Now movement held a vigil at the spot where Emil Grinzweig, a peace activist, was killed by a hand grenade explosion at a demonstration during last Thursday's Cabinet session.

Peace Now and other antigovernment factions have charged that the retention of Sharon in any capacity in the Cabinet would defy the intention of the inquiry commission, which called for the defense minister's resignation and suggested that Begin should fire him if he refused. But the government's confidence in Knesset ratification of the proposed shuffle of Cabinet responsibilities appeared well founded and there were no signs of serious defections from Begin's coalition over the issue.

Zevulum Hammer, a leader of the National Religious Party, a part of the coalition, said the commission's main criticism was directed at Sharon's performance as defense minister.

"I believe this is the proper way to cope with the problem," said Hammer, Israel's education minister, of the Cabinet shuffle.

Government officials based much of their defense of the decision to keep Sharon in the Cabinet on an opinion by Israel's attorney general, Yitzhak Zamir. Zamir told the Cabinet today that with Sharon's departure from the Defense Ministry it will be impossible to argue that he had not "drawn personal conclusions," the euphemistic phrase that the commission used in telling Sharon he should resign.

Asked if the Cabinet shuffle did not violate the spirit of the commission report, Energy Minister Yitzhak Modai snapped, "That's nonsense. You go by the letter and Mr. Sharon has lived up to the letter. I'm sorry he had to, but I'm glad he did."

Modai added, "I don't think it is fair for anyone to bear any consequences for the massacre because there was no crime done by Israel . But we had to abide by, we wanted to abide by, the recommendations of the commission, which we appointed."

As minister without portfolio, Sharon will have no specific duties or responsibilities except those that Begin chooses to assign to him. Meridor said there was no discussion during the Cabinet meeting about what exactly the intensely ambitious, outgoing defense minister will do in his ill-defined new post.

There has been speculation here that Sharon might be put in charge of the occupied West Bank and Gaza Strip. Sharon met privately with Begin this afternoon, presumably to discuss his future in the government.

There was also much speculation but no answers to the question of how Sharon will handle his new role. There was a widespread assumption that he will not easily give up the dominant position in Israeli politics that he enjoyed as defense minister. One of his aides was being quoted anonymously today as saying, "Those who did not want Sharon as Army chief of staff got him as defense minister. Those who do not want him as defense minister now may get him as prime minister."

There was also a growing expectation here that Arens, who is as hawkish as Begin and Sharon, would agree to become defense minister. One possible complication was that Arens is a member of Herut, Begin's and Sharon's political party, and that his appointment to the Cabinet would throw off the balance with Israel's Liberal Party, the other main component in the ruling Likud bloc.

But officials said they expected ways to be found to get around this internal political problem.

Meanwhile, Lt. Gen. Rafael Eitan, the Army chief of staff, made known his recommendations in the aftermath of the inquiry commission's report. Eitan proposed that Maj. Gen. Uri Simhoni, the head of training in the Army, be named chief of military intelligence, replacing Maj. Gen. Yehoshua Saguy, whose removal from the intelligence post was recommended by the commission.

Eitan also recommended that Brig. Gen. Amos Yaron replace Simhoni as chief of Army training programs, a position that normally carries the rank of major general, one step higher than Yaron's current rank. The inquiry commission had recommended that Yaron, who was commander of all Israeli forces in Beirut at the time of the massacre, be removed from command in the field for at least three years.

Eitan was also severely censured by the inquiry board, which made clear that it did not recommend his removal only because his term as chief of staff expires in April.

Eitan made no recommendations regarding Maj. Gen. Amir Drori, the Army's northern commander. The commission criticized Drori but did not suggest any action against him.