Opposing factions of Israel's national unity government are close to agreement on a compromise formula for handling the Taba land dispute with Egypt and avoiding a Cabinet confrontation that could force an early election, informed government sources said.

The "inner cabinet" of 10 senior ministers heard a proposal today by Finance Minister Yitzhak Modai that Egypt and Israel meet to work out the terms of reference that would be discussed by an arbitrator or conciliator should the current deadlock be resolved over calling one in.

While the subcabinet still has to meet again before presenting the proposal to the full Cabinet, government sources said that both Likud and Labor ministers appeared to favor Modai's suggestion as a means of averting a showdown that could break up the government headed by Prime Minister Shimon Peres.

Peres was said to be hopeful that Egyptian President Hosni Mubarak would agree to the reversal in the order of normal processes used in arbitration or conciliation, thereby moving Egypt and Israel closer to the normalization of relations called for in their 1979 peace treaty.

If the Cabinet adopts the proposal, most likely in a vote Aug. 23, Israel and Egypt would put aside the seemingly intractable issue of arbitration and begin immediately to define what will be discussed when the land dispute negotiations reach their final stage -- whether in arbitration or conciliation.

Mubarak has held firm to his demand that the Taba dispute be resolved in international arbitration, a position to which Peres and the Labor Party ministers have been generally agreeable but unable to accept because of opposition from Likud ministers led by Vice Premier Yitzhak Shamir.

Peres' aides have said that the dispute over Taba, a narrow strip of beach south of Eilat on the Gulf of Aqaba, must be settled to bring Mubarak actively into the joint Jordanian-Palestine Liberation Organization peace initiative and encourage other moderate Arab states to follow suit.

Under Modai's proposal, Israeli and Egyptian differences would be discussed as soon as talks could be arranged. Egypt does not want to discuss sovereignty or the issue of where the border should be, but only wants to discuss where the border markings are located.

Israel maintains that border markings have been changed throughout the history of the Sinai Peninsula and that the issues are sovereignty and where the legal frontier should be placed.

While the compromise formula would head off a Cabinet crisis on the issue -- Peres' aides had said they intended to force a vote -- it is likely to drag the Taba negotiations out over a long period, assuming that Egypt agrees to discuss the terms of reference first.