In what may be the Reagan administration's most direct public suggestion that Israel free more than 700 Shiite prisoners, Vice President Bush said today, "We think that people being held against international law should be released."

At a press conference here on the second leg of his 10-day European tour, Bush was asked if the United States would welcome the prompt release of all Shiite prisoners still in Israel.

Bush declared that U.S. policy would "certainly welcome" the early release "of people that are illegally held hostage." Continuing his response, Bush said the administration earlier "expressed our concern about prisoners being held in Israel."

But, Bush added, "We are not in the position of linkage; we are not in the position of knuckling under to the demands of hijackers."

While stressing again that the United States was "not going to participate in linkage" of the release of the 40 American hostages with the release of the Shiites by Israel, as is demanded by the Shiite hijackers, Bush said, "We think that people being held against international law should be released."

Israel has said the Shiites were detained for security reasons during the Israeli Army's withdrawal from southern Lebanon. President Reagan, during a press conference last week, said it was his understanding that "taking them across a border from their own country and into another country is a violation of the Geneva accords." But Israel, citing another provision of the Geneva conventions, has denied that the Shiites are being held illegally.

Bush used his 24-hour stop in Bonn to exhort all western nations to join together in fighting the terrorist challenge to their societies.

"Just as civilized nations united against piracy a century ago, today we of the democratic world will need to act in concert if we are to eliminate this modern scourge," Bush said at a lunch hosted by West German Chancellor Helmut Kohl.

Earlier today, in an hour-long meeting, Bush secured a firm promise from Kohl that West Germany would intensify its cooperation with the United States in battling global terrorism.

Bush told reporters that one of his first priorities as head of Reagan's special task force to combat terrorism would be to urge western countries to bolster security at their airports and to improve the exchange of intelligence information on terrorists. He said there were also ways that nations could coordinate preemptive attacks on terrorists, but refused to give details.

Kohl, who yesterday ordered West German airports to step up already tight security controls in the wake of last week's bombing at Frankfurt airport, vowed that West Germany would work closely with the United States and other allies in developing practical and effective measures against terrorism.

Bush's European tour was designed to solicit views and soothe anxieties among the allies about President Reagan's Strategic Defense Initiative. But that subject has been overshadowed by the terrorism theme, following the hijacking of 40 American hostages in Lebanon and the suspected bombing of an Air-India 747 over the Atlantic Ocean.

Bush said he and Kohl spent half their time discussing SDI and possible European cooperation in the "Star Wars" research project.

Bush said the United States backed a French proposal known as "Eureka" calling for an independent European project covering civilian space research. He said the United States would also welcome another European initiative, now under consideration by the Bonn government, to build its own shield against short- and medium-range missiles.

Bush said the administration was "not uptight" about the notion of a European Defense Initiative because such a program "works toward the common good" of "putting weapons at risk instead of people."

Kohl emphasized that West Germany had not yet decided about joining the SDI project but conveyed his political support for the objectives of missile defense research, Bush said.

Bonn insists it will not participate unless it receives assurances of gaining full access to all new technologies that emerge from SDI.