ERUSALEM, March 27 -- Interior Minister Natan Sharansky announced today that he would restore to an Israeli Arab village part of its land that had been taken to develop a neighboring Jewish town.

The move was the first of its kind, and it has potentially far-reaching implications. The action contradicts decades-old policies under which Arab-owned land had often been expropriated to build Jewish communities.

The step was intended "to strengthen the democratic character of the State of Israel and to provide equal opportunity to all citizens," Mr. Sharansky, a former human rights campaigner who was jailed in the Soviet Union, said in a statement.

Critics of the move said that it set a dangerous precedent and that it would encourage Israeli Arab villages and towns across the country to demand that land lost to neighboring Jewish communities be returned to them.

The decision was another step toward equality for the one million Arab citizens in Israel.

This month, the Supreme Court ruled that an Israeli Arab couple could not be barred from a community that had been built just for Jews.

Mr. Sharansky said he had decided to restore 250 acres of vacant land that had been taken from Kafr Kassem, northeast of Tel Aviv. The land was seized decades ago for what was described as security reasons but was later turned over to the neighboring Jewish town of Rosh Haayin for an industrial zone.

After residents of Kafr Kassem had pressed to recover the land, an Interior Ministry committee recommended in 1997 that the area be restored to the village.

But the interior minister at the time, Eli Suissa of the strictly Orthodox Shas Party, did not carry out the recommendations.

Mr. Sharansky said he had decided to restore the land after the mayor of Rosh Haayin had rejected a proposal that the area be jointly developed by both communities as a shared industrial zone.

Kafr Kassem could now use the site to set up its own industrial zone, benefiting from the income, Mr. Sharansky said, adding that his decision was meant to promote "social justice" and to help "close gaps" between Arabs and Jews in Israel.

Mayor Yigal Yosef of Rosh Haayin warned that returning the area to Kafr Kassem would lead other Arab communities to demand that their boundaries be redrawn at the expense of neighboring Jewish communities.

"They're asserting historic rights, but if we accept this claim the whole country will be theirs," Mr. Yosef said. "The whole ideological basis of setting up a Jewish state is slipping away."

Community leaders in Kafr Kassem, the site of a massacre of 49 villagers by Israeli border guards who were enforcing a curfew in 1956, welcomed Mr. Sharansky's decision.

"The State of Israel owes a special debt to Kafr Kassem because of the tragedy of the massacre," said the chairman of the local council, Sami Issa. "I hope this will be the start of a new policy of planning for the Arab sector that will solve its problems."

Many Israeli Arab towns and villages are short of land for expansion. Large areas have expropriated over the decades for Jewish communities.

Sheik Abdullah Nimr Darwish, a leader of the Islamic Movement in Israel who lives in Kafr Kassem, said Mr. Sharansky's past as a Soviet dissident had made him sensitive to the needs of Israeli Arabs. "As a person who suffered repression," Sheik Darwish said, "he knows that

injustice breeds hatred."