The Senate dealt a significant blow to the Bush administration's Central American policy by voting 74 to 25 yesterday to cut military aid to El Salvador by 50 percent.

The Senate action, which President Bush has threatened to veto, came during consideration of a $15 billion foreign aid bill that includes a provision to forgive Egypt's $7 billion debt to the United States for prior military aid assistance.

The administration had said the Egyptian debt proposal was essential to maintaining solid Egyptian support for the U.S. Persian Gulf policy. The Senate defeated, 55 to 42, an effort to kill the debt-relief proposal.

The Senate's move to halve the $85 million military aid proposal for El Salvador, which is similar to a measure approved by the House in June, places Bush in a difficult position of having to veto the entire foreign aid bill if the Salvadoran aid provisions are not changed in conference.

This is the first time Congress has moved to significantly cut military aid to the U.S.-backed government during its 11-year civil war. U.S. military aid levels, which peaked in the mid-1980s at slightly more than $100 million, have been about $85 million in recent years.

"I'll be amazed," if the president vetoes the bill, said Sen. Christopher J. Dodd (D-Conn.), who with Sen. Patrick J. Leahy (D-Vt.) sponsored the aid cut. Dodd, speaking to reporters after the vote, said Bush "presumably wants some support for Egyptian debt relief." By vetoing the whole measure and sending it back to Congress, the administration risks having the Egyptian debt proposal reopened.

Under the Dodd-Leahy amendment, the military aid would be halved unless antigovernment rebels launch a major military offensive or refuse to negotiate. All aid to El Salvador would be cut if the government failed to investigate and prosecute those responsible for the November slayings of six Jesuit priests.

The bill still gives Bush "tremendous flexibility," Dodd said. "He has a great deal of discretion" in deciding whether the two sides, now engaged in U.N.-sponsored peace talks, are negotiating in good faith to end the fighting. "This will make the negotiations work," he said.

A senior administration official said last night that it was not the 50 percent cut that was "objectionable but that it was not tough enough on the {rebels}." The Bush administration had lobbied heavily for an alternate provision that would have required the rebels to agree to a cease-fire before aid could be cut.

An amendment for that provision failed, 58 to 39. Both sides had expected that vote to be closer despite administration warnings that the aid cut would promote delaying tactics by the rebels in U.N.-sponsored talks.

In other action on the $15 billion foreign aid bill, the Senate defeated an effort to register U.S. disapproval of Israeli plans to settle Soviet Jews in new housing in East Jerusalem.

The surprise move, sponsored by Sen. Robert C. Byrd (D-W.Va.) and Senate Minority Leader Robert J. Dole (R-Kan.), would have put the Senate on record as objecting to settlements in East Jerusalem or on the West Bank or Gaza Strip as "contrary to the intent and spirit" of U.N. resolutions promoting settlement of Israeli-Palestinian problems.

The amendment, which was defeated 90 to 8, said a recent Israeli decision to encourage Soviet Jews to settle in East Jerusalem contradicted earlier Israeli assurances that a $400 million housing-loan guarantee program approved by Congress would not directly or indirectly settle Soviet Jews in the territories.

Several senators who voted against the amendment said the lopsided count should not be construed as Senate approval of the settlements but rather a result of the last-minute nature of the proposal.

Staff writers George Lardner Jr. and Dan Morgan contributed to this report.