Jerusalem — Clusters of Israeli families stood in the chilly evening air admiring a tan Fiat 900 car tied up in an enormous red ribbon bow. Nearby 12 salesmen eagerly chatted up potential customers who could win a similar Fiat simply by making the first $18,000 payment on a $100,000 villa in the planned new Israeli settlement of Nofim on the occupied West Bank.
Even as the Reagan administration was publicly announcing its willingness to do everything possible to halt Israeli settlement on the West Bank if King Hussein of Jordan would join negotiations over that area's future, the first housing fair for private Israeli developers who construct homes for new settlers on the West Bank was concluding a smashingly successful one-week run.
More than 70,000 Israelis visited the exhibition organized by the Israeli Housing Ministry in Tel Aviv over the Passover Jewish holiday week.
Israel's continued refusal to halt work on settlements was a critical factor in King Hussein's decision to step aside from the peace process. It was taken as a sign of US inability to influence its close ally now or in future negotiations over the West Bank.
Israel, however, reacted to last week's statement by the State Department by insisting the problem was not settlement but ''Arab refusal to make peace.''
The tone of the settlement building fair was political as well as businesslike. At the entrance a huge exhibition featured a map of the West Bank lighted with bulbs to show scores of settlements built by the current Likud government. Tinsel streamers connected bulbs to signposts advertising the number of housing units already existing in individual settlements.
Huge photographs of Housing Minister David Levy meeting with religious Jews at the large new Orthodox settlement of Emmanuel were set up outside the exhibition hall. Mr. Levy is one of a number of government figures competing to take credit at home for the settlement drive.
At least one of the 18 private construction firms exhibiting housing models was oriented toward attracting US Jews to settle on the West Bank. Amcon, the Israeli representative for the American firm Boise Cascade, displayed colored photos of American-style ranch homes with carpeting and fixtures. They could be ordered complete and set up inside any West Bank settlement.
''Americans are our easiest customers,'' said Zvi Altshuler, chairman of Amcon's board of directors, ''because they know what these houses are about.'' He said about 12 ''Kingsberry homes'' had been built on the West Bank and many more inside Israel's 1967 borders.
West Bank settlers' associations and world Zionist organizations are working to bring 1,000 American Jewish families to spend the month of July on various settlements in hopes of encouraging immigration, according to Meir Fisher, leader of the growing West Bank Jewish town of Ariel, which had an exhibition at the fair.
The reasons for the public interest in the fair, according to organizer Arik Hening, were interest in cheaper housing and quality of life. ''On the West Bank you can have a villa in a small town, the dream of every Israeli,'' Mr. Hening said. ''The average price of $100,000 for a villa on the West Bank is very cheap in Israel.'' Changing slide shows offered photos of villas with red tile roofs atop lovely green and brown West Bank hills.
Most Israelis live in privately owned apartments which are very expensive in cramped central urban areas. On the West Bank, private developers are given ''state'' land almost at cost, driving down the prices. Mortgages are cheaper and more easily available. The government has encouraged private development to speed the West Bank settlement drive despite lack of government funds.
Mr. Hening, a supporter of the opposition Labor Party, said no Israeli government - even Labor - would give back the settlements. ''Labor's only problem is that they don't want to settle near Arab cities on the West Bank,'' he said. Most of the settlements advertising at the fair are close to Israel's 1967 borders and are therefore acceptable to Labor, he said.
The Likud government is encouraging Jewish settlement next to and inside major Arab towns.
Some potential settlers were being deterred by fears about security on the West Bank, Mr. Hening admitted, adding he would not live there. Outside the exhibition hall a demonstration against settlement by the Israeli dovish Peace Now movement featured huge cartoons of a man, woman, and child loaded down with guns and wireless equipment - an intended satire on ''typical settlers.''