A deadlock in the Israeli government emerged today over the Taba border dispute with Egypt, dealing a setback to Prime Minister Shimon Peres' hopes of improving Egyptian-Israeli relations and enhancing the prospects for broader Middle East peace negotiations.

Peres, the head of the Labor Party, and Foreign Minister Yitzhak Shamir, leader of the rival Likud bloc in the national-unity government here, met for an hour this morning but failed to reach agreement on the dispute, which involves conflicting Egyptian and Israeli claims of sovereignty over a small strip of beach front at the tip of the Gulf of Aqaba.

In a series of lower-level negotiations this spring, Egypt made it clear that an improvement in its relations with Israel hinged on Israeli willingness to turn over the Taba dispute to an international arbitration panel. Following such a move, the Egyptians have indicated, political, cultural, commercial and other ties between the countries would improve and Egypt would return its ambassador to Tel Aviv.

The ambassador was recalled to Cairo for consultations almost three years ago following the massacre of Palestinians at the Sabra and Shatila refugee camps in Beirut. The Israeli Army then was occupying that city.

Peres is eager to dispose of the Taba issue, believing there could then be a summit conference between him and Egyptian President Hosni Mubarak that might add momentum to the effort to arrange talks between Israel and a joint Jordanian-Palestinian delegation over the future of the Israeli-occupied West Bank and Gaza Strip. But Shamir, speaking for an apparently united Likud, today rejected the call for arbitration of the Taba dispute, insisting that the issue should first be submitted to a nonbinding process of conciliation.

The deadlock between the two main parties in the government was a setback for Peres' longer range diplomatic goals. While it did not appear to threaten an immediate crisis in the government, the differences over what both sides say they regard as a relatively minor issue illustrated the difficulty the fragile national-unity government will have in agreeing to a joint approach to peace talks.

According to officials who are close to him, Peres believes that improved Egyptian-Israeli ties are crucial to the overall Middle East peace process for two reasons. First, this would strengthen the hand of King Hussein of Jordan against Syria and other radical Arab states because, by moving toward peace with Israel, he would be aligning himself more closely with Egypt -- the largest and most important Arab country.

"You would have a new situation in which for the first time Egypt enjoyed good relations with both Jordan and Israel," one official said.

Peres also reportedly believes that the Israeli public has been deeply disappointed by the "cold peace" with Egypt and is unlikely to support concessions to Jordan unless it becomes convinced that peace with its Arab neighbors will bring concrete benefits, according to officials close to the prime minister.

The right-wing Likud bloc is ideologically opposed to any Israeli concessions on the West Bank and clearly intent on undermining Peres' hope of achieving a breakthrough in the peace process.

Shamir and his aides today downplayed the importance of the Taba issue, saying Israel had much more important problems facing it.

For the Egyptians, Taba has become an issue of national honor, with Mubarak insisting that only arbitration can resolve the dispute. The sandy strip of land just south of the Israeli town of Elat is the site of a $35 million luxury hotel owned by Israelis.

Taba is the largest and most important of 15 border disputes that were left unresolved by the 1979 peace treaty. In the meantime, it has remained in Israel's control. The peace treaty calls for such disputes to be settled by a process of negotiation, followed by conciliation and finally binding arbitration.