TABA, Sept. 18— In 1906 a battalion of Ottoman soldiers from the nearby Jordanian port of Aqaba tried to occupy this 700-yard-long stretch of sand.

The British, interested in protecting the Suez Canal, wanted to hold it because it presented a clear cannon shot from here across to Aqaba.

Ultimately, the Turks agreed to London's demand that the border between British-controlled Egypt and Turkish-controlled Palestine be ''properly'' marked.

Taba's historical significance might have ended there had it not been for an Egyptian Jewish immigrant to Israel named Eli Papouchado, who owned a small hotel in the Israeli Red Sea port of Eilat but dreamed of bigger things.

A 326-Room, $20 Million Hotel

All of the port's limited beachfront was occupied, so in the early 1970's Mr. Papouchado arranged, through a dizzying series of legal maneuvers, to get a lease from Prime Minister Menachem Begin's Government to build a 326-room, $20 million hotel along the empty Taba beach.

When Egypt and Israel signed their peace treaty in 1979, the Egyptians, much like the British, asserted that Taba was theirs. Israel, much like the Turks, argued that it was part of historic Palestine - especially now that Mr. Papouchado's hotel and huge swimming pool, with a palm-studded island bar in the middle, was there.

''When I started to build, no one was dreaming about peace with Egypt,'' Mr. Papouchado said. ''But then, when Sadat came to Israel, I knew that if I continued building there was going to be a big noise. But I love it.''

''Tourists come because we have a beautiful setting - from your balcony you can see Egypt, Jordan, Saudi Arabia and Israel - because we provide all kinds of activities and because we are an international problem.''

He added, ''How many people get to stay at an international problem?''

Mr. Papouchado may have had a little help from Taba's first Israeli resident, Rafi Nelson, who set up a beachclub here 17 years ago, trying to escape Eilat. Today, the Nelson Village is a blend of Tahiti and Dodge City, including covered wagons, saloons and a stagecoach scattered amid thatched-roof beach huts guarded by friendly peacocks.

Mr. Nelson manages things from the bar, where he can usually be found wearing a bathing suit, a cowboy hat, a rawhide string tie on a bare chest and a Budweiser in his holster.

The saloon is decorated with a stuffed bull's head, a stuffed bear, a stuffed monkey with a beer bottle dangling from his ear and a hammerhead shark atop the bar.

Mr. Nelson was asked whether he was worried about losing his 98-year-lease on Taba beach, since Egypt and Israel agreed last week to submit the border dispute to arbitration. ''I'm very optimistic; I'm always optimistic,'' he said. ''We have a good case.''

Everyone else in Nelson Village seems optimistic, too.

Another component of Taba is the few hundred remaining yards of public shoreline, which is the closest thing in Israel to Fort Lauderdale -except that here it seems that every weekend is spring break.

Israeli 18-year-olds like to come to Taba for some fun before starting their army service.

Dov Sharf, the former Israeli Army commander in Taba, said that in the last four years, every month or so a father would show up at his door with a picture of a teen-age girl and a common refrain: ''Can you help me find my daughter? We think she came to Taba.''

But Taba has an appeal to more than Israeli 18-year-olds. Leora, a 33-year-old free spirit from Tel Aviv who often flies down for the weekend, seemed to put her finger on it. 'A Twilight Zone'

''Before Israel got the Sinai in 1967,'' she said, ''the only way to get away from it all was by going abroad. There was nowhere here to just lose yourself. Then we got Sinai.''

She continued: ''The Sinai was kind of a twilight zone. The rules of the game there were different. It was the one place in Israel where you could do whatever you damn well pleased and no one would criticize you. It was an emotional demilitarized zone.''

''And then, suddenly it was lost back to Egypt,'' Leora went on. ''So all of those things about the Sinai got squeezed into this little place called Taba. It is the only place left where you can just be cool and loose.''

''I am definitely a leftist,'' she said. ''I was all for giving back the Sinai and would even support a Palestinian state. But I am extremely reluctant to give up Taba. It's really the last of something.''

Sorting out the rival Egyptian and Israeli claims over Taba is a lot like reading the clues on one of those ancient treasure maps that wash ashore in bottles.

The Israeli claim is based on the fact that when the Egyptians and the Turks marked the Sinai border, they said each border pillar could be seen from the one before it.

Israel contends that the border runs either through the ''granite knob'' overlooking Nelson Village or through the cluster of palm trees at the end of the public beach - both of which afford a clear view of the previous pillar, even though today there are no border pillars at either place.

The Egyptians assert that the border is a few hundreds to the east of the Sonesta Hotel, where one can find atop a hill the remains of a supposed border pillar.

The only problem is that from the Egyptian spot it is impossible to see the penultimate pillar, which means no inter-visibility as the history books said.

Five international lawyers are expected to begin meeting in Geneva in the next few months to decide on a winner. The legal proceedings should take two years, and, as in any good lawsuit, the lawyers are already assured of victory. Each arbitrator is to be paid a minimum of $100,000.

Somewhere along the way, the issue of Taba - no one can remember the origin of the name - seems to have been blown out of all proportion.

Abba Eban once joked that Taba had assumed such a ridiculous size in the Israeli peace debate that it was almost ready to replace Jerusalem as a focus of historical Jewish longing, as in the psalm, ''If I forget thee, O Taba, let my right hand forget her cunning.''

Overblown or not, lurking behind the last two years of negotiations between Egypt and Israel over this patch of baking desert seems to be a message with more sobering implications.

A senior Israeli official said, ''If it took Egypt and Israel this long and this much agony just to work out a framework for the arbitration of Taba, imagine what it would be like trying to negotiate over Jericho, or Nablus, or Jerusalem?''

photo of the beach at Taba (NYT/Micha Bar-Am)