Time Magazine and Ariel Sharon, Israel's former defense minister, reached an out-of-court settlement today of Sharon's libel suit against the magazine in a Tel Aviv District Court.

Time, according to court officials and a spokesman for the magazine, agreed to pay Sharon partial legal expenses, but Time would not disclose the sum. The magazine, a spokesman said, also expressed its regret over the article and admitted that it contained erroneous material.

Sharon said tonight that he now considers the matter, which he pursued in both U.S. and Israeli courts, "settled."

Sharon had sued Time here for $250,000, charging that the magazine had libeled and defamed him by falsely reporting that before the September 1982 massacre of Palestinians and Lebanese civilians at the Sabra and Shatila refugee camps in Beirut, he had talked with relatives of Lebanon's president-elect, Bashir Gemayel, and discussed possible revenge by Christian Phalangist militiamen for Gemayel's assassination.

The massacre occurred shortly after Gemayel died in a bomb explosion in Beirut.

In the trial of a similar libel suit in New York last year, a jury found that Time's report, which the magazine had said was based on a secret appendix to an Israeli inquiry commission's report on the massacre, was false and defamatory. But the jury also found that the article did not libel Sharon, who had sued for $50 million, because Time did not know it was false and did not publish with malice.

Spokesmen for Time in Tel Aviv and New York said the magazine decided on a settlement because the judge in the Israeli court had already accepted the New York jury's findings of false and defamatory reporting, but had not accepted the final verdict that there had been no libel with malicious intent.

Time said that "in light of that decision, and in view of the fact that no more evidence would be made available for the Israeli action than was available for the New York libel action, there seemed to be no point in further litigating this matter."

The Time spokesman added, "Time had already more than a year ago expressed regret over the error concerning Appendix B" of the inquiry commission's report.