LONDON, JULY 25 -- Britain announced sweeping cuts today in the size of its military in what was billed as the most radical transformation of the country's defense posture since World War II.

Defense Secretary Tom King told the House of Commons that the government would reduce forces in West Germany by half and make overall cuts of 25 percent in army personnel over five to seven years. He also announced major reductions in air force and navy personnel and a phaseout of older equipment, including planes, submarines and surface ships, but he said Britain would retain its nuclear arsenal and continue both the Trident and Polaris nuclear submarine programs.

The announcement had been long expected, but the lucrative "peace dividend" that some Conservative Party members had been urging the government to deliver did not materialize with the planned cuts. Analysts said much of the potential savings would be spent on new equipment as a sweetener to win acquiescence in the cuts from Britain's top military brass. The rest would go to compensate for what appears to be more than $1 billion in overspending in this year's defense budget due to double-digit inflation.

King, who got final approval for the cuts from Prime Minister Margaret Thatcher and the cabinet this morning, said there would be "substantial savings" eventually, but he refused to specify the amounts or indicate when those savings might be available. He made clear they would not arrive in time to allow the government to divert defense funds to tax relief or social-welfare spending before the next national election, scheduled to take place by June 1992.

"The aim is smaller forces, better equipped, properly trained and housed, and well motivated," King told the House. "They will need to be flexible and mobile and able to contribute both in NATO and, if necessary, elsewhere."

The cuts, which follow a five-month defense review, are contingent on completion of a multinational agreement in Vienna to reduce conventional forces in Europe, as well as further Soviet military reductions, he said.

At present, Britain maintains about 55,000 ground troops and 11,000 air force personnel in West Germany as part of NATO forces there. King's plan would cut those numbers in half and withdraw at least one of the army's three armored divisions there and seven of its 16 tactical-aircraft squadrons.

It would also cut overall army strength from 160,000 to 120,000 and reduce the 90,000-member air force to 75,000. Older aircraft would be phased out, but Britain would maintain its commitment to the $36 billion European Fighter Aircraft project. The navy and marines would lose only 3,000 men, but the navy would lose 11 of its 27 submarines and have its fighting fleet reduced from 48 ships to 40.

The opposition Labor Party welcomed the announcement but warned that the economic impact of the cuts would be greater than King outlined. King's statement, said Labor defense spokesman Martin O'Neill, "will mean very little to the House if we do not have a price tag attached to them."

Other critics said the cuts did not go far enough. A report by independent defense economist Malcolm Chalmers of Bradford University claimed that Britain could halve military spending in real terms by the end of the decade and still meet its commitments. He said a "peace dividend" of nearly $100 billion over the decade could be achieved.