Bush Hints at Way Out of Persian Gulf Crisis : Diplomacy: President suggests that Iraqi withdrawal from Kuwait could open door to Arab-Israeli settlement.

Offering the first hint of a U.S. plan to seek a diplomatic solution to the crisis in the Persian Gulf, President Bush told the United Nations General Assembly on Monday that an Iraqi withdrawal from Kuwait could open the way for peace between Israel and its Arab neighbors.

“In the aftermath of Iraq’s unconditional withdrawal,” Bush said, “I truly believe that there may be opportunities: For Iraq and Kuwait to settle their differences permanently, for the states of the gulf themselves to build new arrangements for stability and for all the states and peoples of the region to settle the conflict that divides the Arabs from Israel.”

Bush’s carefully worded message closely parallels a proposal made one week ago at the General Assembly by French President Francois Mitterrand and comes one day after Iraq’s President Saddam Hussein commented favorably on Mitterrand’s speech, praising its “positive tone.”

Taken together, the statements by Bush, Mitterrand and Hussein could provide the outline for a possible peaceful end to the gulf crisis--a settlement in which Hussein pulls his troops out of Kuwait but is able to tell his people that his invasion accomplished the goal of bringing about an international Mideast peace effort.

But optimism over a peaceful settlement in the gulf remains faint. Although Bush’s new language could provide an opening for diplomatic moves, the gap between Iraq and its opponents remains wide. Bush, briefly answering questions from reporters a few hours after his speech, emphasized that “Iraq’s unconditional departure from Kuwait” must come before any other development.

“There’s no flexibility” on that demand, Bush said. Mitterrand had made a similar point in his speech.

For his part, Hussein once again Sunday ruled out an Iraqi withdrawal from what he claims as Iraq’s 19th province.

And while the statements by Bush and Mitterrand could open the way to a diplomatic solution of the gulf crisis, their words could also serve a war policy, Western officials noted. The proposals could help peel away Hussein’s Arab support and solidify international backing for the use of force against Iraq by portraying Hussein as a man blocking a chance for a wider Middle East settlement, the officials said.

A senior French diplomat made that point last week after Mitterrand offered his peace proposal, saying the French president doubted that Hussein would accept his terms but expected his plan would either give Hussein a diplomatic fig leaf to cover a pullout from Kuwait or would clear the way for military action to dislodge his troops.

Bush, in his speech, called Iraq’s invasion of Kuwait a “throwback to another era, a dark relic from a dark time.”

“Iraq and its leaders must be held liable for these crimes of abuse and destruction,” he said, a statement that could cover both a war crimes trial, which U.S. officials have made some preparations for, and Iraqi reparations payments to Kuwait, which the Arab League has demanded.

The stakes in the conflict are high, Bush said, charging that Iraq’s “aggression in the gulf is a menace not only to one region’s security, but to the entire world’s vision of our future.”

And he insisted that his talks with diplomats and world leaders here showed no holes in the anti-Iraq front. That support was on display in the General Assembly Hall as diplomats--except for the Iraqi delegation--gave Bush sustained applause when he declared that Iraq’s “annexation of Kuwait will not be permitted to stand.”

By suggesting that the long-festering Arab-Israeli conflict could be settled once Iraq ended its occupation of Kuwait, Bush seemed to link the two issues in a way that he had previously not done.

Any linkage is loose. Bush did not suggest--as Hussein has done--that all Middle East conflicts must be settled at once. But he did join Soviet President Mikhail S. Gorbachev and some Western European leaders in calling for a renewed effort to settle the Arab-Israeli conflict in the wake of the gulf crisis.

Bush’s explicit mention of the Arab-Israeli conflict did not represent a change in U.S. policy, but it was a shift “of emphasis,” as the President put it in his press conference. White House officials confirmed that the statement could be a signal in what one official called “a flurry” of diplomatic initiatives over the last week.

The Israeli government opposes any linkage that would increase the international pressure on Israel to end its 23-year occupation of the West Bank and Gaza Strip.

Bush has always strongly rejected any explicit “linkage” of those issues for several reasons. While Bush would like to provide some excuse that would allow Hussein to withdraw from Kuwait, he also wants to ensure that Iraq does not end up appearing to have profited from aggression--two goals that are obviously in conflict.

In addition, the disputes between Israel and the Arabs have resisted resolution for decades. Even in the current atmosphere of unprecedented superpower cooperation and new relations between old enemies, any Arab-Israeli negotiation would certainly be a long and difficult process. If such a process is to start, Bush wants to make sure that Iraq withdraws from Kuwait first and not at the conclusion of any negotiations.

But both Bush and Hussein are in a struggle to gain the support of Arab peoples and governments in the gulf conflict. Hussein has gained at least some leverage by positioning himself as the champion of the Palestinians.

Many Arab leaders have supported the idea of an international conference on the Middle East, believing that such a meeting would pressure Israel to withdraw from the occupied West Bank and Gaza Strip. Many Israeli leaders believe the same thing and have therefore opposed a conference.

Bush’s speech was also notable for its enthusiastic embrace of the United Nations, an institution that only a few years ago U.S. officials treated with disdain.

“The U.N. is now fulfilling its promise as the world’s parliament of peace,” he said. “Let it be said of the final decade of the 20th Century: This was a time when humankind came into its own, when we emerged from the grit and the smoke of the industrial age to bring about a revolution of the spirit and the mind and began a journey into a new day, a new age and a new partnership of nations.

“At last--at long last--we can build new bridges and tear down old walls,” said Bush, a former U.S. ambassador to the United Nations.

The Administration, Bush said, is “fully committed to supporting the United Nations and to paying what we are obliged to pay by our commitment to the charter.” The United States began withholding part of its U.N. dues under the Reagan Administration in protest of U.N. policies. The withholding has continued, in part because members of Congress object to U.N. payments that take away money that could be used for domestic programs in this era of tight budgets.

Bush also reiterated his call for an international ban on chemical weapons and proposed creation of a U.N. office to assist developing democracies in holding free elections.

Times staff writer Norman Kempster contributed to this story.

OIL PRICES PLUMMET: Crude futures plunge as war jitters ease. D1

OTHER STORIES, A6-A10