Iraq Restoring Iran Ties in Bid to Ease Isolation : Diplomacy: Baghdad hopes Tehran will help break the embargo. Hussein offers free oil to 3rd World.

The Iraqi government moved Monday to fully mend fences with Iran, its enemy of the 1980s, by announcing that it will restore diplomatic relations with Tehran.

Foreign observers in Baghdad interpreted the move as one more effort to break out of the international isolation that has developed since Iraq invaded neighboring Kuwait on Aug. 2.

It was the second gesture President Saddam Hussein has made to Iran in less than a month. In mid-August, he announced the withdrawal of Iraqi troops that had occupied a section of Iran after the 8-year Iran-Iraq War ended in 1988 and renounced his claim to disputed territory at the head of the Persian Gulf.

Also Monday, Hussein offered to supply oil free of charge to Third World countries suffering from higher prices brought on by the Mideast crisis.

In a televised speech read as usual by a network announcer, Hussein said: “We announce today that we are still your brother and share with you the same destiny. Therefore, we declare now that we are prepared to supply you with Iraqi oil free of charge.”

He said that anyone who wants the oil, “under the assumption” that such a gift is not forbidden by U.N. sanctions, should simply apply for it.

“We are prompted by a principled and moral commitment to ease some of your burden and to demonstrate solidarity with you,” Hussein said. “Such a decision is not related to, and shall not be affected by, any of your decisions and attitudes toward the current crisis.”

With oil revenues cut off, along with imports of food, medicine, spare parts and machinery, the blockade is taking a toll on Iraq, but analysts say the country has not yet begun to buckle under the strain. Iran and Iraq share a long border, and if Iran decided to ignore the sanctions, the blockade could collapse.

The announcement on the restoration of ties came at the end of a two-day visit to Tehran by Iraq’s Foreign Minister Tarik Aziz. He was shown on television here speaking cheerfully with Iranian officials.

The announcement seemed to suggest that Iraq wants more than just formal diplomatic ties. Western diplomats noted that the quest for “natural” relations implies trade links as well.

The Iran-Iraq War ended two years ago in a cease-fire brokered by the United Nations, and when Iraq formally sued for peace last month, it was seen as an effort to free troops for use against the multinational force being assembled on the Arabian peninsula.

In the months since the war, neither Iran nor Iraq had shown so much as a glimmer of trust until last spring, when Hussein raised the possibility of a summit peace conference.

The key point of dispute was the Shatt al Arab, the waterway that forms the two nations’ southern border. Control of the waterway, the gulf outlet of the Iraqi port of Basra, was a prime strategic target for Baghdad’s troops when they poured into Iran in September, 1980. Five years earlier, the late Shah Mohammed Reza Pahlavi, then the power in the gulf, had forced upon Iraq an agreement to share the Shatt al Arab straight down the middle.

Two weeks after the invasion of Kuwait, faced with the first elements of what has become a massive Western military buildup in the gulf region, Hussein called for an exchange of prisoners of war, the withdrawal of Iraqi troops from Iranian territory and a 50-50 division of the Shatt al Arab.

“Everything you wanted . . . has been realized,” he said in a letter to Iran’s President Hashemi Rafsanjani.

Although Hussein’s propaganda organs announced that peace on the Iranian border would permit the military to move 30 divisions, more than 300,000 men, to the southern front “for the great duel” over Kuwait, intelligence reports indicate that fewer than five of the divisions have shown any sign of moving.

Now, with the blockade proving effective, Hussein is believed to be looking to Iran as a way of circumventing the blockade and bringing in supplies. Large shipments of food would be sighted easily in sparsely populated Jordan, but Iran has a population of more than 50 million, and increased supplies could be brought into Iranian ports without seeming unusual.

Two days before Aziz arrived in Baghdad, the English-language Tehran Times openly suggested that “humanitarian shipments” might be passed through to Iraq. Ever since U.N. trade sanctions were imposed last month, Hussein has been probing for potential soft spots with a series of public relations gestures.

To Arab nationalists, he has portrayed his cause as a battle against Westerners out to subjugate the Arab world. To Muslims, he has depicted himself as a defender of holy shrines in Saudi Arabia. Addressing his former arms supplier, the Soviet Union, he has called for a return to the days when Moscow and Washington battled by proxy in Third World conflicts.

These appeals have failed to have any effect on the noose being tightened around Iraq, and now Hussein is waving a seductive card at the Third World, particularly at debtor countries hard hit by rising oil prices.

Striking an us-against-them note, Hussein accused the Western powers of forgetting the poor countries’ troubles in their frenzy to turn back Iraq’s invasion of Kuwait.

“It should not come as a surprise to you, brothers, when the big and developed countries do not show much concern for your issues,” he said.

The United States and its allies, he said, “did not ask, nor did they provide an answer to the harm they would bring to the Third World countries. While oil monopolies are still drawing filthy profits from this crisis, they let Third World countries muddle into their crises.”

Whether anyone takes Hussein up on the offer may be beside the point, analysts believe. They say he is trying to win sympathy in the underdeveloped countries on the basis of their needs and his apparent generosity.

His offer will hit several poor Asian countries at a time of frustration with the West. Asians perceive that Western governments are ignoring the plight of tens of thousands of Indian, Pakistani and Filipino workers trapped in Kuwait and Iraq.

Asian diplomats in Baghdad complain that their citizens are de facto hostages because they lack the means to get out, while the West is obsessed with the Western hostages.

“No one cares about brown-skinned refugees,” Achmed Sakkam, the Philippine ambassador, complained.

The Asian workers are helpless because the only exit open to them is through Jordan, where hundreds of thousands of refugees already are waiting for transportation home. Jordan has slowed the flow of refugees from Iraq in order to relieve the pressure.

Iran, on the other hand, has offered to open its border with Iraq to refugees, but Iraq has made no move to let refugees out on that side.

Staff writer Nick B. Williams Jr., in Nicosia, Cyprus, contributed to this article.