Is it appropriate to ask an interviewer about the language the job position is in?
Sure. As answered elsewhere: you're allowed to ask interviewers questions. It is good to try to make yourself look good when asking such questions. So, don't ask:
Can I get by with my current skill?
What level of fluency will be needed to be doing this job very well?
In the job description “Working level of English” was mentioned as a requirement.
That is, unfortunately, vague. They didn't say "multiple college-level English courses required", or something so clearly defined. They said, "working". You need to have enough language that your skills effectively work. Whether your skills will work for their workplace depends on your skill, and also depends on their workplace.
Is it appropriate to ask whether the language of the position is going to be English?
No. Don't ask this. You can safely assume that English is going to be part of what is needed for the job. After all, they did ask for it.
I'm keeping the above answers rather short because other answers seem to have addressed those questions well enough.
I don't feel confident enough to work and communicate entirely in English on daily basis. Should I just decline the job?
No. Don't do that. People doing that result in many jobs being given to less qualified people who didn't just disqualify themselves. Even if you don't meet the posted requirements, it is worth pursuing a position of interest. Often companies post "requirements" hoping to attract top talent, but they settle for less. Another reason companies post such "requirements" is so that people feel less qualified when they get to the interview, so the companies are in a better bargaining position. Jobs are frequently given out to people who don't qualify for all of the posted requirements, so definitely don't let a simple requirement statement knock you out from even showing interest (unless the job posting explicitly mentions that unqualified people should not apply, which I have seen, rarely).
In your case, you do appear to meet the requirements. So, by all means, do apply. If they need more than what you can offer, hopefully that will come out during the interview. If not, you can also ask them when they let you know that you have been selected. When you're told that you're hired is another opportunity to ask more clarifications about your new job. In most cases, if you change your mind before your first day, that won't be too impolite because that will still be a rather minimal disruption to the company.