REYKJAVIK, Iceland (AP) _ With flags, spruced-up streets and a precedent-breaking live television broadcast, a proud and excited Iceland greeted President Reagan on his arrival Thursday for a summit with Soviet leader Mikhail Gorbachev.

Reagan arrived at Keflavik Airport, the Icelandic international airport also serving the island's U.S.-run NATO base, at 7.02 p.m. local time.

The president was greeted in a drizzly rain by Icelandic President Vigdis Finnbogadottir as well as Prime Minister Steingrimur Hermannsson and Foreign Minister Matthias A. Mathiasen.

As Reagan arrived at the U.S. ambassador's residence where he will spend the next three nights, several dozen Icelanders lined a street corner and cheered, clapped and squealed in delight when he waved to them.

A U.S. president in Iceland is a major event for this remote, sparsely populated country, and as one of the spectators, 24-year-old factory worker Smare Gudmundsson put it, ''This is a big moment for everybody.''

In choosing to broadcast the arrival ceremony, Iceland's 20-year-old state network departed from a policy of prohibiting television broadcasts on Thursdays - a policy adopted at its inception with the aim of enhancing family intimacy.

Iceland's state radio opened a special English-channel for the media with music, newscasts and announcements of arrangements for covering summit events.

The Hofdi, the graceful bayside house where Reagan and Gorbachev will have their two days of talks, was polished up with a fresh coat of beeswax on its wooden floor. A large pit dug outside for a sewage project was filled in so the leaders would have an unobstructed of Reykjavik Bay and the volcanic mountains beyond.

Bleachers were set up outside the two-story white clapboard house for camera crews. The Icelandic government, well-attuned to superpower security demands, commandeered neighboring office blocks to prevent them being taken over by TV networks.

Streets leading to the U.S. Embassy, where Reagan will be staying, were closed off by police ahead of the president's arrival.

The weather was 40 degrees and drizzly, but in Iceland's variable weather, a sunny summit was not ruled out.

About 50 campaigners for Soviet Jewry were expected to assemble in Reykjavik, hoping for permission to demonstrate outside the Hofdi. They include Soviet immigrants coming from Israel to fight for the right of other Jews to leave the Soviet Union.

The Israeli group includes two members of parliament, and Israeli President Chaim Herzog has written to Mrs. Finnbogadottir asking that they be allowed to hold a peaceful demonstration.

Her response was not immediately known.

The campaigners have ignored appeals from the Icelandic government to stay away and thereby preserve the peaceful atmosphere for which the two leaders chose Iceland as their venue.

The government also said the campaigners' activities would overburden its tiny police force.

Mayor David Oddsson, whose capital of 90,000 is the smallest and northernmost in Europe, said about 8 million kronur - $200,000 - had been spent cleaning up Reykjavik for the summit.

He said Reykjavik was lucky that it was celebrating its 200th anniversary as a city and had given many of its buildings a fresh coat of paint before the summit was announced.

He said that since the summit was announced with less than two weeks' notice, city employees had worked overtime to finish road repairs and construction jobs up to two months ahead of schedule.

Fifty Soviet and 50 American flags were flown into the country to be hoisted at the places the two leaders will visit. Since neither is coming on an official visit to Iceland, no welcoming crowds were expected.

''We haven't really run into major problems organizing this, and it's quite amazing,'' he said.

Aggrieved at foreign press reports of ''Reykjavik in chaos,'' the 38-year- old lawyer and former political satirist said in an interview:

''A city of 90,000 is being descended upon by nearly 4,000 officials and journalists. If these numbers were applied to London, it would be 400,000 people, and I'm fairly sure London would notice them.''

At a cinema in eyeshot of the Saga Hotel, where the Soviet delegation is staying, the billboards advertising ''Top Gun,'' an American film of the ''Rambo'' genre reviled by Moscow as anti-Soviet, mysteriously disappeared.

Cinema manager Fridbert Palsson insisted it was a coincidence, saying the movie had been switched to a different cinema. He said some of the Soviet advance party had come to see the film, even though the Kremlin cites it as an example of anti-Soviet propaganda coming out of Hollywood.

The International Press Center, an elaborate facility providing the media with phones, telex lines, food and material about Iceland, moved into high gear as the radio began broadcasting its announcements of summit coverage arrangements.

But the shortage of overseas phone lines was becoming acute, and reporters found it increasingly difficult to dial out of Iceland.