Members of Israel's parliament who are illegally occupying a house in this predominantly Arab town in the occupied West Bank said today that their demonstration goes beyond an expression of the right of Jews to settle here, and is also meant to underscore their opposition to peace negotiations between Israel and a joint Jordanian-Palestinian delegation.

The sit-in by four members of the Knesset, which began Thursday night and is to be joined Monday by up to 28 more right-wing legislators, is growing into a confrontation between the Labor and Likud factions of the coalition government of Prime Minister Shimon Peres over West Bank settlement and the future of the Middle East peace process.

The Knesset members, immune from arrest, moved into the house after a group of Jewish settlers were evicted by the Army last week.

The issue of Jewish settlements in Hebron split the 10-member "inner cabinet" today. By a 5-to-5 vote along party lines, it deadlocked on an effort by Foreign Minister Yitzhak Shamir to gain endorsement of his contention that the decision of the previous government of Menachem Begin approving Jewish settlement in Hebron remains in effect.

After the vote, Peres referred the issue to Defense Minister Yitzhak Rabin, who already has spoken out against the sit-in at the Hebron house.

The Knesset demonstrators and their supporters said that while they are trying to revive Jewish settlement in Old Hebron's Arab marketplace, their larger goal is to show opposition to the "legitimization" of peace talks with the Palestine Liberation Organization by Israel and the United States.

Knesset member Geula Cohen, of the right-wing Tehiya Party, said in an interview at the house that she and her colleagues would "raise the flag" of Jewish settlement to protest "the atmosphere surrounding the legitimization of talks with the PLO."

Knesset members Eliezer Waldman, also of Tehiya, and Michael Eitan, of the Likud Party, taking part in the sit-in, also criticized the joint Jordanian-PLO peace initiative.

The squatters said they would be joined Monday by leading conservative Knesset members, including former Army chief of staff Rafael Eitan and former West Bank military commander Binyamin Ben-Eliezer. Trade Minister Ariel Sharon visited today to offer his support.

Army troops were positioned in front of the house and on its roof today to prevent Arab attacks against Jews, which have been frequent during the past five years.

The four-room house is the first building in the heart of Hebron taken over by Jews without the claim that it had been Jewish-owned before a 1929 massacre of Jews by Hebron Arabs.

Jewish resettlement of Old Hebron reached its peak in March 1980, when the Begin government asserted that "Jews are allowed to live anywhere under the sun," and authorized settlers to move into Arab neighborhoods to "recreate a Jewish presence."

Settlement projects have been frozen for the past year under the Peres government, which said that they could lead to clashes between Jews and Arabs.

The house, formerly Arab-owned, was bought by the Organization for Resettlement of Jews in Hebron, but the government ruled that Jewish settlers should be restricted to the adjacent Jewish Quarter, where 28 Jewish families now live. An Arab middleman who sold the house to the settlers has sought sanctuary in the Jewish Quarter because of threats against his life, the settlers' organization said.

Otniel Schneller, head of the Council for Settlements in Judea and Samaria, biblical names for the West Bank, said today that the occupied house was only a symbol for a larger political struggle against the current peace process.

"For us, it is not so important to build new settlements as it is to show all over the world that to go into negotiations for peace is fine, but territorial compromise is impossible," he said, referring to the Labor Party's stated intention to begin direct negotiations with the Jordanian-Palestinian delegation to discuss peace in exchange for Israel's withdrawal from parts of the territories it seized in the 1967 Arab-Israeli war.

Schneller conceded that the revived Hebron settlement drive has become as much a political weapon for the Likud and its right-wing allies to use against the Labor Party in determining the outcome of other issues as it was an ideological dispute.

Asked why the house was being occupied now, two years after it was purchased by the Hebron settlers' movement, Waldman said it was because the "disturbing" direction of the peace process had encouraged Arab nationalists to renew their attacks on Jews in the West Bank.

Cohen said, "The more Jews who are here, the more we will be safe. This building in my view is more important than 10 settlements outside Hebron, because it is in the heart of the Palestinian state they want."

Arabs in the narrow alley adjoining the occupied house said they feared a worsening of violence.

"There will be trouble. They can't live safely here. People here are already frightened," said Abdul Toufi Zarou, a money-changer several doors up the alley from the house.

Farid Shawa, who said his family has owned a small shop adjacent to the house for 60 years, said, "Business is bad because the soldiers move in and people are afraid. People want peace. They don't want this trouble that the Jews bring here."