A measure of local rule will be restored to Nablus, the largest city in the Israeli-occupied West Bank, this month for the first time in nearly four years when the Arab Chamber of Commerce takes over the running of civil functions from an appointed Israeli mayor.

The planned transfer of responsibility has deeply divided this politically intense city. Advocates of the move say it will improve living conditions and could lead to elections within a year -- the first in the West Bank since 1976 -- while opponents condemn any cooperation with Israeli occupation authorities.

An election, if approved by the Israeli military government in the West Bank, would in effect be a plebiscite for the Palestine Liberation Organization and its leader, Yasser Arafat, backers of the transfer say. The military governor has approved the Arab civilian takeover of the Nablus government and has indicated that elections are a possibility in the future, although no final commitment has been made on restoring voting rights.

If other West Bank cities are permitted to follow suit, Palestinian leaders here said, the revival of politics could have a profound effect on future decisions on who will represent West Bank Arabs in any Middle East peace negotiations between Jordan and Israel.

The elections, the Arab leaders said, would demonstrate beyond any doubt that West Bank Palestinians insist on having the PLO represent them in peace talks.

The new mayor of Nablus, the West Bank military government has decided, will be Zafir Masri, 44, head of the Chamber of Commerce and an uncle of Jordan's foreign minister, Taher Masri.

Masri will replace a Druze Israeli Army officer, Jabr Hanou, the latest Israeli to hold the position since Mayor Bassam Shaka was deposed in March 1982, two years after Shaka's legs were blown off by a car bomb placed by Jewish settlers.

Israeli officials said the move is part of a fulfillment of Prime Minister Shimon Peres' pledge last year to "improve the quality of life" in the occupied territories by restoring some of the Arab self-governance taken away following the anti-Israeli turmoil of the late 1970s.

Masri, a member of one of the most powerful families in the feudal-like political hierarchy of Nablus, is a pro-Jordan supporter of the PLO, but he is better known as a successful industrialist and community business leader than as a political activist.

He has become the target of bitter criticism by Shaka and other opponents of the turnover of city government, including the leftist faction of the trade union movement and communist parties. His critics have charged that accepting an appointment by the military governor and participating in Israeli-sponsored elections is "traitorous."

In an interview in his home here, Masri argued that essential municipal services had deteriorated so much in recent years that as long as Palestinians are unable to bring an end to occupation, they should at least make life as bearable as possible for themselves.

Under the Israeli administration, Masri said, the city's electrical generating plant has become run-down, water services have worsened, taxes and unemployment have gone up and business growth has ground to a halt. Moreover, 500 city workers have been on strike since the municipal council was disbanded in March 1982, compounding the joblessness, he said.

"The question became, who should represent the people of Nablus if the Israelis were willing to step out?" Masri said. "Some said we should have a broad-based municipal leadership and not just the Chamber of Commerce running things. This is a good idea in principle, but not practically, because to get a broad base, you need to hold meetings among many different groups."

Israeli security regulations governing the West Bank, he noted, prevent the holding of such meetings.

Masri said the purpose in accepting the takeover is to "get the Israelis out of office, bring back the striking employes and after a year, hold elections. Then we can say, okay, we have brought back the Arab municipality."

If the transition goes smoothly, military government sources said, then the cities of Ramallah, Hebron and Bira, all of which have Israeli Army officers serving as mayor, could follow suit. Four other West Bank towns with pro-Israeli Arab mayors appointed by the military governor -- Jenin, Kalkaliyeh, Halhoul and Dura -- also are under consideration for handing over civil government to popularly chosen Arab leaders.

Masri said he made repeated inquiries to the Jordanian government and the PLO about their positions on the changeover and received no answers.

"About six months ago, they said, 'Stop asking us what to do. It's up to the people.' I figured if there was no objection from Jordan or the PLO, then they approved. They could have made a statement either directly or on television, but there was nothing," Masri said.

Shaka, a former Syrian Baath Party activist, has increasingly turned toward radical, pro-Syrian PLO splinter groups since he was deposed by the military governor, and stands to become even more politically isolated if Masri succeeds in gaining elections next year. However, he continues to oppose Masri's compromise with the military government, saying that as long as Nablus remains under occupation it should not cooperate in any way with the Israelis.

Hatem Abu Ghazaleh, a former member of the Jordanian parliament and, since 1964, a member of the Palestinian National Council, the PLO's parliament-in-exile, said that before Masri agreed to lead an interim Arab government, most Nablus politicians were hesitant about calling for Israeli-sponsored elections because of PLO opposition.

"Now, as soon as we have a transitional period with Zafir as mayor, nobody will say it is treason to call for elections," said Abu Ghazaleh, a physician and well-known Nasserite scholar who has been imprisoned four times by Israeli security authorities.

Calling Masri a "pure PLO man without slogans," Abu Ghazaleh said in an interview that if elections are held in Nablus, "we will be very openly for the PLO and Abu Amar Arafat ."

With the leftists and radicals backing a pro-Syrian PLO splinter list of candidates, Abu Ghazaleh said, the poll will evolve into a plebiscite for Arafat's mainstream Fatah wing.

Asked whether he believed the Israelis would tolerate such a politically volatile vote, Abu Ghazeleh replied, "If they refuse, American and European public opinion will go against them."

If Nablus and other West Bank cities are allowed to hold elections and give overwhelming support to pro-PLO candidates, as they did in the 1976 voting, it would demonstrate to all parties to the peace negotiations that the PLO must be included in order to win West Bank Arab support for the talks, Abu Ghazaleh said.

"The Israelis should be demanding that Arafat join the negotiations, or otherwise they will go nowhere," he said. "Do you think a fourth-rate Palestinian can sign for peace with Israel? It will be null and void the minute the ink is dry. We have to demonstrate to the Israelis that Arafat is ready to negotiate with Israel, and that he is the one Palestinians in the West Bank support."