Israel's government survived one of its most severe coalition crises as it decided in a marathon session early today to submit to international arbitration the six-year-old dispute with Egypt over the Taba beachfront in the Sinai Peninsula.

The 10-member "inner cabinet," faced with a warning by Prime Minister Shimon Peres that he would rather break up the national unity government than leave the issue unsettled, debated for more than 12 hours before reaching agreement on a package deal in which arbitration and a resumption by Egypt of normal relations with Israel are linked.

Peres, emerging from the meeting bleary-eyed, told reporters, "I think it will enhance relations between Israel and Egypt, it will make peace stronger, more promising and more stable."

The prime minister added that while technical documents are being drafted to submit to arbitrators -- a period he estimated to take six to eight months -- the arbitrators will "try their hands" at conciliation.

Israel and Egypt will still have to agree on the composition of an arbitration panel.

The agreement must now be returned to Egypt for concurrence in changes that were made in what Cairo had accepted during months of discussions.

The cabinet dispute centered onwhether to put the territorial question of Taba, a 250-acre slice of beachfront south of Eilat on the Gulf of Aqaba, to international arbitration or conciliation, and under what terms. The strip of land was retained by Israel when it turned the rest of the Sinai back to Egypt in 1982.

The Likud faction of the coalition government, led by Foreign Minister Yitzhak Shamir, insisted that any decision to go to binding arbitration be conditioned on Egypt's implementation of unfulfilled agreements, reached in the 1979 Camp David peace treaty, to normalize relations between the two countries.

This morning's crucial meeting represented a showdown that the Labor Party and Likud partners in the coalition had sought to avoid for months. Peres, however, said he was determined to bring the issue to a climax before he leaves on an official tour of European countries at the end of the week.

Egyptian President Hosni Mubarak had set resolution of the Taba dispute as a condition for resuming normal relations with Israel. Egypt withdrew its ambassador to Tel Aviv following the 1982 massacre by Israeli-backed Christian Lebanese militias at the Sabra and Shatila Palestinian refugee camps.

Sources close to Shamir said that the foreign minister, who is scheduled to rotate into the premiership in September, insisted that a proposed package agreement with Egypt specifically mention conciliation as a first step before Taba is submitted to arbitration.

Finance Minister Yitzhak Modai said that under the agreed package deal, continued arbitration is dependent on continued normalization of relations. The Likud bloc had demanded such linkage, according to the aides to Shamir.

Shamir also had demanded that Egypt dissociate itself from Palestinian terrorist groups. The compromise agreement declares that both nations would respect provisions of their 1979 peace treaty to prevent terrorist attacks from their territory.

Peres and Shamir have been at odds over the Taba issue for months, with the dispute reaching far beyond the question of territorial concession over a tiny parcel of land.

The Taba dispute had congealed into a test of wills between Labor and Likud over how far and how fast the Israeli government should move toward a comprehensive Middle East peace and into an intense debate over the viability of the 1979 Egyptian-Israeli peace treaty.

For Peres, Taba became also a question of the prerogatives of power, one which went to the heart of the 1984 coalition agreement on shared rule. Maintaining that the government could not conduct foreign policy if it had to struggle for months to obtain Likud acceptance of a formula for resolving the Taba dispute, Peres threatened to let the coalition collapse.

Peres had said that he views Taba as an artificial obstacle that threatens to block any progress in the peace initiative launched last February by Jordan's King Hussein.

For their part, Shamir and other Likud ministers, some of whom opposed the 1979 Camp David peace treaty that returned the Sinai to Egypt and who have expressed wariness over the current peace initiative, have regarded Taba as only a symptom of Egypt's unwillingness to reestablish full normal relations with Israel.

They have argued that by standing his ground on the Taba question, Mubarak has sought to demonstrate to other Arab leaders that he is capable of extracting political concessions from Israel, thereby justifying Egypt's decision to make peace with the Jewish state.

If Israel yielded on Taba, according to the Likud argument, Mubarak would seek another pretext for stalling normalization of relations in the face of new Egyptian political demands.

"The Egyptians want to return to the Arab fold, but not on their knees, begging. They want to point to some benefits achieved not only for the benefit of Egypt, but for all Arabs. If we return Taba, they will find another issue with which to extract more concessions out of us," Yosi Ben-Aharon, one of Shamir's closest advisers, said in an interview.

Other Foreign Ministry officials, conceding that Taba is strategically insignificant, said they opposed a territorial concession on the grounds that Israel since 1979 has always been the giver and Egypt the taker.

A breakthrough on the issue appeared imminent last month when Mubarak sent Peres two messages offering a compromise package deal in which Taba would be submitted to conciliation for a limited period of time, followed by binding arbitration. Mubarak also agreed to a system of arrangements after arbitration in which the losing side would have access to Taba.

Taba remained under Israeli control after Israel completed its withdrawal from the Sinai Peninsula in 1982 even though Egypt insisted that it should have been returned with the rest of the territory occupied by Israel in the 1967 Six-Day War. Subsequently, an Israeli-owned luxury hotel and an Israeli-built holiday village were completed on the parcel.

Mubarak, in his messages to Peres, also offered to meet with the Israeli prime minister and to return an Egyptian ambassador to Israel, as well as to implement a number of unfullfilled agreements on normalization of relations.