A Time magazine correspondent testified today that he thinks Ariel Sharon's return to power is a sign that "something is rotten in the state of Israel."

The correspondent, David Halevy, an Israeli citizen, continued to testify as a "hostile witness" in Sharon's $50 million libel trial against Time Inc. Halevy said he thinks that Sharon "should hide, stay away from politics" after an Israeli commission found him indirectly responsible for the 1982 massacres of Palestinians in Beirut.

Sharon was ousted as defense minister on the recommendation of the Israeli commission, which reported its findings in February 1983. He remained in the Cabinet, however, and after a new government came to power last summer was appointed minister of industry and commerce.

Today, Sharon sat in a front-row seat as Halevy spoke with emotion about Sharon's political resurrection, the uncovering of Jewish terrorists accused of killing Arabs and other trends the correspondent said are "corrupting my society."

Sharon's lawyer, Milton S. Gould, had opened the line of questioning in an attempt to demonstrate that Halevy habors a personal bias against Sharon.

Gould introduced as evidence a dispirited personal memo Halevy had written Time's chief of correspondents in May in which he expressed weariness and alarm that Sharon's "vindication" was among signs of "mysticism, fascism and radicaliam" overtaking Israel -- trends he compared to the atmosphere of pre-Hitler Europe.

"The gap between my generation's dreams and the day-to-day reality is too big," Halevy said in the memorandum.

Confronted today in court with his words, Halevy did not flinch. Rather, he seemed to welcome the opportunity to state his views to an American jury.

"The state of Israel, the good thing about it, for years it was a shareholding company where every citizen had his share," Halevy testified. "And then at a certain point it started deteriorating . . . . I was worried and still am very worried about where my country is going."

In an effort to counter attempts last week by Sharon's lawyers to impugn Halevy's integrity and credibility as a journalist, Time's attorneys today had Halevy recite a list of exclusive stories he has written over the years, and they introduced as evidence three publisher's columns on Time's index page that singled out Halevy for praise.

Halevy's testimony today also provided glimpses into the special working conditions of Israeli journalists. He recalled that he informed his editors in New York about the beginning of the 1973 Arab-Israeli war just before the magazine's deadline, then put on a uniform and went to the Suez Canal front, where he commanded a tank battalion.