In a surprise move, lawyers for Time Inc. announced in court this afternoon that they would not call any witnesses to defend the magazine against former Israeli defense minister Ariel Sharon's $50 million libel lawsuit.

Time lawyer Paul C. Saunders indicated to reporters afterward that the company did not believe that Sharon had proved that the magazine had defamed him in a February 1983 article or that Sharon had shown that Time had serious doubts about the accuracy of the report.

"We rested because we thought that, given the state of the record, we were ahead," Saunders said. "Any time you can quit while you're ahead, you do it."

The announcement, only hours after Sharon had left the courthouse to fly home to Israel for the trial's holiday recess, set off pandemonium in the courtroom.

Time had two witnesses waiting to be called and U.S. District Court Judge Abraham D. Sofaer had summoned jurors back to the courtroom when Saunders stunned observers, and Sharon's lawyers, by announcing simply, "We will rest."

Sofaer sent the court's stenographer sprinting to keep jurors out while he sought to confirm that Time did not intend to mount a defense.

Sharon's lead counsel, Milton S. Gould, said, "I need hardly explain to your honor that we are astonished . . . ."

Jurors were instructed to return Jan. 2 for completion of the trial. Gould indicated that he would seek to recall Sharon before final arguments, but Time lawyers indicated that they would oppose the move.

Although Time lawyers had indicated at the outset of the trial that a major portion of their defense would be to show that Sharon had a longstanding reputation as a "bloodthirsty militarist," Sofaer had informed them during the trial that he would limit their ability to introduce such evidence.

Sofaer indicated that such testimony would be "inflammatory" and said he would allow it as evidence only if the jury ruled against Time. Time then could discuss Sharon's reputation to guide the jury on the amount of damages it might award, he said.

All this week, Time lawyers had been evasive about their defense.

Today's surprise tactic appeared to increase pressure on Sharon, Israel's minister of industry and commerce, to persuade his Israeli Cabinet colleagues to allow a Time representative to inspect secret documents relating to the 1982 Beirut massacres at the heart of the case. The Cabinet is to consider the matter Dec. 30.

Time offered last week to publish a retraction or correction if the documents do not substantiate its report.

In the 23 days of the six-week trial, eight of 13 persons called to testify for Sharon have been Time employes subpoenaed as "hostile witnesses," enabling lawyers to ask leading questions.

Saunders said the fact that he and other Time lawyers have been able to cross-examine the eight is one reason why Time feels that "we've already made our case."

After court recessed, Gould complained bitterly, saying his firm spent more than $500,000 for trips to Paris, Washington and Israel and to reproduce depositions that will not be used.

Sharon contends that Time libeled him in one paragraph of a report Feb. 21, 1983, on results of Israel's Kahan Commission investigation of the massacres by Lebanese Christian Phalangists of hundreds of Palestinians after Israel invaded West Beirut.

The commission publicly found that Sharon, then defense minister and architect of the Lebanon invasion, bore "indirect responsibility" for the massacres because he failed to foresee that they might occur when he sent Christian Phalangists into two Palestinian refugee camps.

Based on reporting by Jerusalem correspondent David Halevy, Time said a secret appendix to the commission report detailed a Sharon conversation with Phalangist leaders the day before the massacres began. Time said Sharon allegedly discussed with them the need to avenge the assassination the previous day of the Phalangist militia commander, president-elect Bashir Gemayel.

Sharon argues that Time, in effect, called him a "mass murderer." Time denies any such defamatory implication, and that will be the first issue for the jury to decide.

Sharon acknowledges meeting with Phalangist leaders but denies discussing revenge and says notes of the conversation are not in the appendix.

An unusual elements of the case is that, as a Cabinet minister and a person implicated in the commission inquiry, Sharon has three times inspected the appendix. The Cabinet has denied access to Time, citing national-security and foreign-policy considerations.

The Cabinet proposed a compromise in which the now-defunct commission's chairman would reexamine the contested document, but Time has insisted, and Sofaer agrees, that it must see the papers if any such report is to be introduced.