Secretary of State George P. Shultz called on Israel Friday night to end its military rule over the West Bank and Gaza and to give Palestinian Arabs "rapid control over political and economic decisions that affect their lives."

Shultz, in a speech on the eve of the 10th anniversary of the Camp David accords, rejected both Israeli annexation of the territories and creation of a Palestinian state.He also opposed a proposal by Yasser Arafat, chairman of the Palestine Liberation Organization, that Israel be forced to withdraw to the lines of partition approved by the United Nations before the Jewish state was established in 1948.

"Israel will never negotiate from or return to the lines of partition," Shultz said in remarks prepared for a Mideast conference at the Wye plantation near Queenstown, Md.

"But it must be prepared to withdraw - as Resolution 242 says - from territories occupied in the recent conflict," Shultz said. "Peace and security for all sides are at stake."

He quoted from the resolution approved by the U.N. Security Council at the end of the 1967 Mideast war. It does not specifically call on Israel to give up all the territory the Arabs lost - nor did Shultz.

But he also did not call for Israel's retention of any of the land, which includes the eastern half of Jerusalem that has become part of Israel's capital.

The speech had the earmarks of a valedictory. Shultz spoke of "fundamental constants" that he suggested the next administration consider in seeking an Arab-Israeli settlement.

The first point was that "the status quo serves the interest of no party" and that peace in the region depends on an agreement between Palestinians and Israelis.

On the Arab side, Shultz gave high priority to the Palestinians and referred almost in passing to Jordan, whose King Hussein this summer abandoned any claim to represent the 1.4 million Palestinians who live on the West Bank and in Gaza.

"Palestinians need to achieve rapid control over political and economic decisions that affect their lives," Shultz said. "Israelis need time to adjust to a new situation, one in which Palestinians - not Israeli military government officials - administer the West Bank and Gaza."

He rejected the position taken by some Israelis that since Palestinians form a clear majority of Jordan's population the country should become their state while Israel retains the West Bank.

"Jordan is a vibrant and heterogenous society, with a strong national identity of its own," Shultz said. "It is not a Palestinian state."

He said Palestinians have a right to participate actively in every stage of negotiations and "must approve the outcome."

At the same time, Shultz called on Palestinians to pursue credible goals.

"The status of the West Bank and Gaza cannot be determined by unilateral acts of either side, but only through a process of negotiations," Shultz said.

"A declaration of independent Palestinian statehood or government-in-exile would be such a unilateral act," he said.