Deadly Game for 2 Leaders : Strategy: Hussein and Bush are maneuvering with military force and diplomacy--and the health of the world economy is at stake.

Iraq’s seizure of Kuwait, followed now by a direct military threat to Saudi Arabia, has become a deadly serious game between two very different world leaders--each maneuvering with military force and diplomacy for stakes that could determine the health of the world economy.

For President Bush, dealing with an unpredictable leader under extremely adverse circumstances, the challenge is to find a combination of diplomatic, economic and military pressures that are sufficient to halt Iraqi President Saddam Hussein’s drive for control of the oil-rich Persian Gulf region.

The danger, Administration officials acknowledge, is that a misstep could lead Hussein to lunge again, creating a situation both more damaging to U.S. interests and far harder to rectify.

“(Hussein’s) calculation so far has been that he can get away with it,” said Richard W. Murphy, a former assistant secretary of state for Middle Eastern affairs. “What we have to do is somehow change that calculation and get it across that the costs will be severe.”

Potentially more important for the President and his advisers--accustomed to more conventional arithmetic--the high-stakes calculations are made more daunting by deep uncertainty about how Hussein is likely to add things up.

“Warnings to Hussein tend to make him act more truculently,” said Graham Fuller, a Middle East expert at the RAND Corp. in Santa Monica. “Instead of backing down, he reacts with belligerence.”

Administration officials said Saturday that they are particularly concerned that Hussein, if he regards his oil routes under threat, will order his army into Saudi Arabia to secure a crucial pipeline that delivers Iraqi supplies to deep-water ports.

Because such an attack might well propel the United States into war, the officials said the Administration has agonized in its efforts to deliver an unmistakable threat without delivering an unnecessary provocation.

In particular, one well-placed source said, the Administration has decided for the moment not to pursue a strategy that would seek to halt the shipments of Iraqi oil through the pipelines in Saudi Arabia and Turkey.

“This is not a Panama, this is not a Grenada, this is not a Tripoli,” retired Adm. William J. Crowe Jr., a former chairman of the Joint Chiefs of Staff, said in a television interview. “You cannot assume Iraq will not react to those attacks.”

On Saturday, the United States and Iraq, one from afar and the other on the ground, each took important steps to consolidate its positions and dissuade the other from taking further action.

To his earlier pledges of quick withdrawal, Hussein added a chilling caveat: Kuwait’s new army would essentially become his own. And along the Saudi border, he massed a force capable of quickly seizing control of the world’s richest oil state.

Bush, assembling new punitive sanctions, enlisted the markets of Europe in his campaign of economic warfare and further underlined his willingness to use American military power if Iraq persists in its march toward the oil fields that are crucial to world energy supplies.

But U.S. military forces are out of geographic reach. They are also in an unaccustomed role in such Third World crises: Far from being a joke, Hussein’s 1-million-man army is fully equipped with Soviet and Western armaments, including about 5,000 tanks, and battle-hardened after a successful eight-year war with Iran.

Under such circumstances, for the present at least, the American side can muster mostly a middle-term threat to fend off an imminent Iraqi challenge.

The long-range struggle pits a diplomatic-minded American President in his first serious military crisis against a war-scarred Iraqi leader who disdains the Western world and has shown no qualms about using misdirection to keep the other side off guard.

Just a day after pledging that Iraqi troops would promptly begin withdrawing from Kuwait today, Hussein on Saturday dashed international optimism by making clear that they would instead don new uniforms and be incorporated into what apparently will be a new 100,000-man Kuwaiti army.

Such consolidation of power in Kuwait, a slap to the United States, signaled Hussein’s firm determination to maintain his war-won dominance over the sheikdom and its bountiful reserves, which give the Iraqi leader control over one-fifth of the world’s supply of oil.

At the same time, in describing the new army as “all-Arab,” the Iraqi leader appeared to be invoking a once-powerful pan-Arab ideology in hopes of winning greater sympathy from neighbors who might be turned against the West.

Some regional experts said they are concerned that a similar motivation might embolden Hussein to launch further military moves, hoping to humiliate the United States and expose its impotence in the region before military response forces had been put in place.

Such a move would be “very dangerous” for Hussein, said Fuller, the Rand Corp. analyst. But he said such a move was increasingly conceivable as part of an Iraqi effort to “recover Arab honor and sock it to the U.S.”

With Iraqi forces enjoying an overwhelming advantage over Saudi Arabia on the scales of military power, the United States--while rapidly assembling forces that might redress the balance--is seeking in the short run to alter the equation with encirclement from afar.

The decision Saturday by the 12-member European Community to halt all oil imports from Baghdad gave a boost to the Bush Administration strategy of isolation, which has already seen the Soviet Union halt arms sales to its former client.

In an attempt to escalate the punishment--and persuade Iraq of its limited options--the Administration now hopes to widen the scope of the sanctions, seeking stiffer penalties from a wide range of sources, including China and the U.N. Security Council.

Such faith in economic sanctions flies in the face of a history that has recorded few successes for them, with enforcers inclined to cheat rather than apply the punishment. But Administration officials expressed confidence that that rule may be less valid in the post-Cold War world, particularly against a nation with as few friends as Iraq.

“This appears to be an unprecedented opportunity for true international action,” one State Department official said.

Under what some believe to be the most likely scenario, if Hussein refrained from new military action but refused to loosen his hold on Kuwait, the United States and other nations would seek to squeeze Iraq economically while relying on its Arab neighbors to negotiate the political solution that no outsider could impose.

But such a time-consuming option also could exact severe costs to the United States, Administration officials acknowledged. Sources involved in management of the crisis said there was considerable concern that a prolonged war of wills with Hussein could push the world toward recession, with one outside expert predicting that oil could rise to $35 a barrel.