Arabs Fear Bargain Reached at Expense of Continued Threat : Mideast: A U.N. debate on a Palestinian peace conference could give Hussein a big boost, some say.

Arab leaders have cautiously welcomed the impending release of Western hostages in Iraq, but some are concerned that the United States may be striking a dangerous bargain for peace in the Persian Gulf at the expense of a continuing threat from Iraq.

The prospect of a U.N. Security Council debate on a Palestinian peace conference just two days after the decision to free the hostages would allow Iraqi President Saddam Hussein to claim credit for progress on the Palestinian issue and emerge from the crisis with renewed influence and the military might with which to exercise it, some Arab officials said.

“It’s almost been determined now there will be no war,” an Arab diplomat said Friday. “But the problem is it looks like a deal was cut. In the Middle East, perceptions are more important than reality. As far as Saddam Hussein is concerned, he has his face-saving way out.”

The United States has repeatedly said it will not compromise demands for a full Iraqi withdrawal from Kuwait, and top Administration officials have rejected the idea of offering the Iraqi leader an escape from the conflict by agreeing to Iraq’s demands for a resolution to the Arab-Israeli problem.

“Precisely because of our consistent position that we will not link the gulf crisis and the Arab-Israeli dispute, this is certainly not an appropriate time for an international conference,” Secretary of State James A. Baker III has said.

But several Arab officials said the timing of a U.N. Security Council meeting on a draft resolution dealing with the Palestinian issue makes such assertions moot. The Security Council meeting had been scheduled for Friday, on the same day that the Iraqi Parliament officially approved the release of the hostages, but it was subsequently put off at least until today.

If the Palestinian resolution were to be approved, one Arab diplomat said, Hussein would have “established a linkage even if there is no linkage.”

A Western analyst with close connections to Baghdad said Friday that there is evidence that the Japanese, Swiss and Swedish embassies in Iraq have already held third-party contacts with Iraqi officials in advance of direct talks between the United States and Iraq in an attempt to determine whether a peaceful settlement to the crisis can be reached.

“A deal is being cut, there’s no question about it, whether or not you want to call it a deal,” the analyst said.

Saudi officials have stopped short of openly accusing the United States of attempting to negotiate with Iraq, but some Saudis say they have become convinced that the United States will not resort to war to end the crisis with Iraq.

“The day the Americans announced they were raising the troop level, that’s the day I questioned America’s resolve,” said one source close to the Saudi government, referring to Secretary of Defense Dick Cheney’s announcement last month that Washington will deploy as many as 200,000 additional troops in the region to give the United States offensive capability against Iraq.

“You don’t need 400,000 men to fight Saddam Hussein. It’s like if I pull out a 9-millimeter (pistol) and say I’m going to shoot you, and you don’t back down, and so I pull out a bazooka. What a bazooka will do, a 9-millimeter will do. America doesn’t have the resolve for war, and Saddam Hussein knows this,” he said.

The Saudis are actively lobbying Washington to maintain full economic sanctions against Iraq even after an Iraqi pullout from Kuwait as a means of reining in the Iraqi military machine.

“If Saddam Hussein gets a deal where the embargo drops, we’re in the worst position we could possibly be,” said one official. “He will give in. He will pull out. But if we drop the blockade, we’re looking at a mess.”

The Saudis and some other Persian Gulf officials are urging a continuation of the embargo against Iraq, even after a pullout from Kuwait, to force Iraq to give up its chemical weapons arsenal and reduce the size of its 1-million-man army.

“He pulls out of Kuwait. You maintain the embargo, you move troops into Kuwait and you just sit there until he collapses,” one gulf diplomat said. “When his government collapses, it will be so broke it will be in need of economic help, and you hand him a shopping list: get rid of the chemical factories, cut your army down to 100,000, destroy your tanks, allow inspection of your nuclear plants.”

Privately, some Arab diplomats say they are fearful that Iraq could emerge from the crisis strong enough to successfully press territorial demands against Kuwait following a full or partial withdrawal of its troops--a fear echoed privately by several Kuwaiti officials.

But other Arab officials, including some in the multinational alliance against Iraq, disagree that it is wise to cripple Iraq’s military might.

“To say OK, let’s go and destroy the Iraqi military: that’s very dangerous, and not only for Iraq, but for others also,” said one Arab official. “As long as the Israelis are here and the Palestinian problem has not been solved, any Arab power in the region, Israel will push to destroy it.”

The Kuwaiti government in exile officially welcomed the decision to release the hostages, but Badr Yakoub of the Information Ministry also emphasized in a statement to the Kuwaiti News Agency that Kuwaitis remain “the major hostage, whom Saddam Hussein is torturing, killing and rendering homeless.”

Egypt’s foreign minister, Esmat Abdel Meguid, said the hostage release is “important,” but he added: “What concerns us more is the continued Iraqi occupation of Kuwaiti land, and our natural demand is to end this occupation and for Iraq to withdraw from all of Kuwait and return to international law. Release of the hostages is (the subject of) only one of a number of resolutions passed by the Security Council, and the important thing is that they should all be implemented.”