The disputed procurement of ocean transportation to move military cargoes to Iceland will continue indefinitely under a Navy system that was to have expired April 30.

The Military Sealift Command's decision to continue operating under that system will give a federal court time to judge a challenge of an alternative bidding proposed by the command.The command is temporarily restrained by U.S. District Court Judge Harold H. Greene from accepting bids under that new system.

The defense shipments involved, which normally would move entirely in U.S. ships as required by U.S. law, are subject to sharing with an Icelandic carrier, Iceland Shipping Co., under a 1986 treaty specifically allowing such an arrangement.

Rainbow Navigation Co., Red Bank, N.J., challenged the new bidding system, halting the process for 10 days and gaining an extension of the original temporary restraining order Friday.

Judge Greene not only ordered the extension Friday of his restraining order until May 13, but set for May 9 argument on a preliminary injunction to block the sealift command from action until the entire challenge to its system is decided.

Meanwhile, both Rainbow and Iceland Shipping agreed to a sealift command request made last Wednesday to continue the cargo sharing and bidding system that prevailed through April 30 until the court orders ran out, but not longer than 60 days.

The proposal included the same cargo allocations (65 percent to Iceland Shipping and the rest to Rainbow), the same rates and other terms and conditions.

Rainbow's president, Henry Downing, confirmed his company's willingness to go along, but not for the rigid 60 days limitation, only until all the court orders expire.

Jon Steffanson, general manager for Iceland Shipping at Norfolk, also indicated his company was agreeable to continuing the original arrangement until the legal issues are resolved.

The treaty and an accompanying memorandum of understanding produced a bidding system under which the low bidder for this traffic automatically had 65 percent reserved for his flag and the balance went to the lowe bidder under the other flag.

The sealift command proposed to alter the system in a number of ways. Rainbow thought those changes, including one opening up the carriage to any bidder by no longer limiting it to small business carriers, would work to its disadvantage.