NEWS ANALYSIS : Israel Sees Upturn in Its Diplomatic Fortunes : Mideast: A guerrilla raid and bombing in a crowded market combine to deflect criticism. U.S. moves are hailed in Jerusalem.

In a dramatic space of two weeks, a crisis that began with wide condemnation of Israel’s treatment of Palestinians ended with potentially key Israeli diplomatic victories and a setback for Palestinians who have been trying to persuade the United States to pressure Israel into peace talks.

Israeli and Palestinian leaders had tried to manage to their own advantage an uproar ignited May 20 when a lone Israeli gunman shot and killed seven defenseless Palestinian workers in the town of Rishon le Zion. Israel is pleased with its management efforts, Palestinians are not.

On Friday, Israeli officials expressed satisfaction with two moves by Washington. First, the Bush Administration is threatening to break off talks with the Palestine Liberation Organization unless the PLO expels a member responsible for this week’s abortive raid on Israel from the sea. Second, the United States used its veto Thursday to block a move by some members of the U.N. Security Council to send a special commission of inquiry to the occupied West Bank and Gaza Strip.

“We can all be pleased” that the United States vetoed the resolution, said Foreign Minister Moshe Arens. “It’s an indication of the fact that we do have very close relations despite the differences of opinion that surface now and then and, lately, quite frequently.”

Israeli officials said they want to maintain the momentum by getting the United States to end once and for all efforts to involve the PLO in peace talks, even indirectly, by the involvement of Palestinians in exile.

“Peace talks can only work if the PLO is dealt out of them,” said Yosef Ben Aharon, a top adviser to Israeli Prime Minister Yitzhak Shamir.

The Shamir government will continue to promote a plan to hold elections among the 1.7 million Palestinians in the West Bank and Gaza Strip in order to select a peace delegation, Ben Aharon said. But, he added, the Israeli government wants progress on other points of the plan, including integration of Palestinian refugees abroad into Arab society and the recognition of Israel by hostile Arab states.

“We want elections, but we don’t want the preparations dominated by the PLO, which was the road that Washington was moving down,” said Ben Aharon.

In the year since Shamir proposed his election plan, no progress has been made toward holding them. Preliminary talks quickly stalled on Israel’s reluctance to work out details with a Palestinian panel that would include PLO followers from abroad and residents of Jerusalem.

Israel opposes giving the PLO a role on the grounds that the group is wedded to terrorism and because the group demands the establishment of an independent state alongside Israel.

After the Rishon le Zion incident and a subsequent army crackdown in the West Bank and Gaza that left at least 15 more Palestinians dead, the Shamir government sought to contain damage to its relations with Washington. For a while, the tide seemed to flow against the Shamir government. President Bush expressed condolences not only for the families of the seven workers but also for other victims of army gunfire. Secretary of State James A. Baker III expressed interest in sending a special U.N. investigative team, but he soon backed off in the face of Israeli protests.

Earlier this week, two terrorist attacks took place that eclipsed the impact of Rishon le Zion and its aftermath. First, someone placed a pipe bomb in a crowded Israeli market, killing an Israeli passer-by. Then, the Palestine Liberation Front, a faction of the PLO, tried to attack the Israeli shoreline by speedboats brought to the coast by a mother ship that embarked from Libya.

The raid failed; four Palestinian guerrillas were shot to death and 12 others were captured. Israel lost no one.

On Friday, local Palestinian leaders, stung by the U.S. veto at the United Nations, announced they were suspending contact with American officials here. They sent a plea to Arab governments to put economic pressure on Washington in support of their cause.

“What the United States did yesterday in the Security Council was to stab all those people who believe in peace,” said Radwan abu Ayash, a leading contact for the PLO in Jerusalem.

And in Baghdad, Iraq, where PLO Chairman Yasser Arafat met Friday with ambassadors of the Soviet Union, China, Italy, France and Ireland and urged their governments to reopen U.N. discussion of the violence in the occupied territories, he also denounced the veto: “I only ask why the United States keeps protecting and covering the crimes Israel is committing against the Palestinian people. Why does the United States champion human rights everywhere but stop doing that when Palestinian human rights are concerned?”

Abu Ayash and several other public leaders of the Arab uprising against Israel concluded a 13-day hunger strike in protest of the Rishon le Zion killings. The Palestinians were urging the United Nations to send in an observer team to protect Arabs in the occupied territories.

The hunger strikers felt themselves under pressure because their stand in favor of diplomacy and of limiting violence in the uprising appeared to be leading nowhere. Since the uprising began in December, 1987, more than 650 Palestinians have died by Israeli gunfire. Palestinians have killed about 220 other Arabs on suspicion of collaborating with Israel. Forty-four Israelis have died at the hands of Palestinians.

Young grass-roots activists have been preaching greater militancy, including the use of firearms. Washington’s most recent moves appeared to leave the public leaders high and dry, and they reacted with uncustomary anti-American rhetoric.

The hunger strikers rejected suggestions that the abortive seaborne raid against Israel on Wednesday by a faction of the Palestine Liberation Front had sunk their effort in the United Nations.

“The United States has a history of supporting Israel no matter what,” said Hannan Ashawri, a faculty member at Birzeit University, which, like all colleges in the occupied areas, has been closed during the 29-month uprising.

The cut-off of relations with the United States and the appeal to the Arab world represents a sea change in the focus of local diplomatic efforts. By limiting Palestinian protest mainly to throwing stones, the leadership had hoped to directly appeal to both American and Israeli public opinion for diplomatic progress.

While the Palestinians view their own prospects to influence the United States as dim, it is not clear what response they will get from Arab leaders. At the recent Arab summit, backing for the Palestinians was limited mostly to anti-Israeli rhetoric. Most Arab countries reject the side-by side, two-state solution proposed by the local Palestinian leaders and endorsed by the PLO.