JERUSALEM (AP) _ Soldiers arrested hundreds of Palestinians and were told Wednesday to fire on riot leaders in the most violent Arab uprising since Israel captured the West Bank and Gaza Strip a generation ago.

Defense Minister Yitzhak Rabin, defying American and U.N. complaints about tactics, said the army was ordered to ''shoot to hit'' leaders of demonstrations that get out of control and to expel or imprison ringleaders without trial.

Prime Minister Yitzhak Shamir said the violence must end before political moves are considered because ''we must not conduct negotiations or seek a solution of peace under pressure of threats or bloody attacks.''

Rainstorms helped dampen the ardor of protesters and violence appeared to be waning Wednesday. Stone-throwing and tire-burning incidents were reported, but Israeli military sources and Palestinians said it was one of the quietest days since trouble began 15 days ago.

Meanwhile, for the second day in a row, the U.S. State Department criticized Israel for its actions in the West Bank and in Gaza.

Spokeswoman Phyllis Oakley urged Israel to give residents of the territories opportunities for a better life and said lethal force should not be used to maintain order.

On Tuesday, the White House and State Department issued a stronger statement urging Israel to end ''harsh security measures.''

The sparks of the violence were the killing of an Israeli businessman in Gaza and a traffic accident the following day in which several Arabs were killed.

Rumors spread that the truck driver ran the Arabs down deliberately. Gangs of young men took to the streets in the West Bank and Gaza, which Israel captured from Jordan and Egypt in the 1967 Middle East War and are home to 1.5 million Palestinians.

A government official, speaking on condition of anonymity, said most Arab laborers returned to jobs in Israel Wednesday and Arab shopkeepers also ended a strike.

Rabin told Parliament that 21 Palestinians had been killed and 158 wounded in the 15 days. He said 31 Israeli soldiers and 19 civilians were wounded. The toll was believed to be the highest on both sides since Israel captured the territories.

Palestine Press Service, which monitors events in the West Bank and Gaza, put the number of Arab dead at 25 and cited reports of more than 350 arrests in the last two days, bringing total detainees to 1,770. It said the sources were relatives of those arrested.

Israeli military and government sources confirmed arrests had been made, but would not give figures.

Palestinians sources said Israeli forces swept into the villages after midnight to round up suspects.

At daylight, soldiers patrolled major West Bank cities and stood guard in Bethlehem, where Christ was born. Mayor Elias Freij said some pilgrims had canceled hotel reservations.

Newspapers said Israel was building two detention centers, apparently like tent cities that housed thousands of prisoners during Israel's Lebanon war of 1982-85.

Itim, the Israeli news agency, said one camp was opened Wednesday near the city of Hebron in the West Bank.

Under emergency regulations adapted from British rule over Palestine before Israel's founding in 1948, the military may hold security suspects without trial for up to six months.

Top army commanders briefed the Cabinet's 10-man security committee and won an endorsement from Shamir of riot-control measures.

Ezer Wiezman, a former defense minister who has urged the army to disengage from refugee camps, demanded a debate and it was scheduled for Thursday, Israel radio said.

Rabin told Parliament that if tear gas, rubber bullets and warning shots are not enough to stop violent demonstrators, soldiers ''may shoot to hit leaders of disorder, throwers of firebombs, as much as possible at their legs.''

He said commanders were authorized to seal off areas before trouble begins, impose preventive curfews and ''use the punishments of deportation and administrative detention against the inciters and organizers of the violent disorders and the terror.''

Military commanders will have more freedom to close schools and institutions ''serving as hothouses for incitement,'' he said.

The army already has closed four colleges for a month and grade schools have been ordered closed until Sunday, affecting 350,000 pupils in the West Bank and Gaza.

Israel rejected U.S. complaints about its tactics and criticized the Reagan administration for not vetoing a U.N. Security Council resolution that ''deplored'' Israeli actions. The resolution passed the 15-nation council Tuesday by a 14-0 vote, with the United States abstaining.

''Israel rejects any attempts to claim that those who disturb the peace and commit acts of violence should be equated with the responsible authorities whose efforts are directed to the maintanence of order and normality,'' the Foreign Ministry said in a statement.

U.S. Ambassador Thomas Pickering told Israel army radio that U.S. statements of concern did not indicate a weakening of the U.S.-Israeli relationship.

''It does not represent a change in the relationship, but a sense of deep concern that friends feel for other friends,'' Pickering said.