THE FIRST THING JOHN KELLY noticed when he arrived in Baghdad on February 11, 1990, was the extraordinary security, the most heavy-handed he had seen in 25 years as a U.S. diplomat in visits to more than 60 countries in all parts of the world. Security men in plainclothes could be seen at frequent intervals along the 11-mile road from the airport. The following morning, as Kelly rode in an official Iraqi car accompanied by Iraqi escorts for the few blocks from the Foreign Ministry to the Presidency, he was stopped three times by burly guards who poked their AK-47 automatic rifles in the window while carefully checking each person's credentials. When he was finally ushered into the presence of President Saddam Hussein, more bodyguards were evident, with guns that Kelly decided were far from purely ceremonial. The atmosphere of fear was so great, he noticed, that the hands of the urbane London-educated interpreter, Sadun Zubaidi, were trembling. Foreign Minister Tariq Aziz, a senior figure and a member of Iraq's Revolutionary Command Council, sat at attention on the edge of a sofa like a little boy at his Sunday school class. A year after being named assistant secretary of state for Near East and South Asian affairs, Kelly was making his first visit to one of the most important and difficult countries in his domain. With the top officials of the Bush administration concentrating on other things, Kelly was the senior American diplomat dealing daily with the Persian Gulf. He had never served in the gulf, had served only briefly in the Middle East during a career mostly centered on Europe and Asia, and had never been in Baghdad before.

In a freewheeling 2 1/2-hour conversation with Kelly on the morning of February 12, Saddam seemed fascinated by the declining position of the Soviet Union and its potential impact on the balance of power in the Middle East. The Soviets, who had long been Iraq's principal international patron, were "finished as a world power," said the Iraqi president, and the United States now had "a free hand" to maneuver. The next five years, he said, would determine whether the United States used its position of unchallenged preeminence in the area for "constructive purposes," or whether it would blindly follow Israel.

Kelly informed Saddam that the State Department's annual Human Rights Report, which was to be made public in a few days, would be sharply critical of Iraq's human rights record, which it termed "abysmal." The report posed particular objections to the regime's inhuman treatment of its rebellious Kurdish minority in the north, which had been suppressed with the intensive use of poison gas in 1988, causing tens of thousands of deaths and producing more than 65,000 refugees. "The Kurds love me," Saddam insisted. If there were time, he said, he would take Kelly to a Kurdish village where "the people come out and kiss my hand."

At the time of Kelly's trip -- and right up until Iraq's invasion of Kuwait six months later -- U.S. policy was guided by a directive from President Bush calling for the pursuit of normal relations with Iraq, on grounds that this would promote stability in the area. A few officials in Washington were becoming uncomfortable about this policy of detente with an often violent regime; however, despite such misgivings, Bush on January 17, 1990, had reaffirmed this policy, putting his signature on a presidential order declaring that expanded trade with Iraq, guaranteed by the Export-Import Bank, was in the U.S. national interest.

Almost exactly one year later, on January 16, 1991, Bush signed another order. This one sent American military forces into action against Iraq in by far the biggest, most costly and riskiest U.S. military engagement since Vietnam. A few weeks after the bombing of Iraq began, Bush said in response to a reporter's question that, in retrospect, he thought the war might have been avoided if the United States had been tougher with Saddam before the invasion of Kuwait. "We tried the peaceful route; we tried working with him and changing {him} through contact," said Bush. "The lesson is clear in this case that that didn't work."

The record suggests, however, that the administration had not paid much attention to the problems posed by this troublesome country. From the day Bush set his policy toward the Persian Gulf in October of 1989 until the morning after the Iraqi invasion, not one meeting of the National Security Council was convened to discuss Iraq. The second-level Deputies Committee, which is convened to study major foreign policy issues, had only two meetings about Iraq before tens of thousands of Iraqi troops moved south to threaten Kuwait shortly before the invasion. Secretary of State James A. Baker III's total involvement in Iraq policy before the invasion, said an aide, could be measured in hours rather than days.

Without attention at these high levels, the chances for a policy shift -- or even for serious consideration of any foreign policy problem -- are slim, especially in the Bush administration. More so than most of their predecessors, Bush and Baker operate U.S. foreign policy in an intensely personal and informal fashion, interacting freely in person or by telephone with foreign leaders and paying much less heed to career professionals. And during 1989 and the first half of 1990, Iraq was seen by most officials in the inner circle of the administration as a foreign policy problem of mid-range dimensions -- to be handled by the middle ranks of government, the John Kellys and below -- not as a menace that could destroy the status quo in the Persian Gulf and draw the United States into hostilities of massive proportions. It simply did not seem believable that Iraq was a serious threat to peace, especially in an era of reconciliation between the United States and the Soviet Union, when the walls were coming down in a long-divided Europe and fighting seemed to be ending in Afghanistan, Angola, Nicaragua and elsewhere.

How the United States sought to cope with Iraq as the war clouds gathered in the Persian Gulf is the subject of this report. Examining the record in greater detail than has been available before raises two haunting questions: Did the Bush administration fail to see the threat posed by Iraq because it was poorly organized to deal with an international problem that had not yet become a major crisis? And if it had paid more attention, more quickly, could the administration have headed off Saddam's attack on Kuwait and thus averted a dangerous and bloody confrontation, the long-term consequences of which are still unknown? Hopeful Beginnings

When April Glaspie went to Baghdad as U.S. ambassador in early August 1988, Iraq's war with Iran was into its eighth year and had become one of the deadliest of all time. The casualties of this conflict, which had begun when Iraq invaded its neighbor in 1980, were estimated as high as 1 million soldiers and civilians, possibly the highest toll of any war since World War II. After a final series of Iraqi victories, Iran's Ayatollah Khomeini announced to nearly everyone's surprise that he was ending the conflict, even though he declared he would rather drink poison than do so. Iran's most prominent war aim, the ouster of Saddam Hussein, remained unfulfilled, and most of the world saw Iraq as the victor.

As the war ended, Glaspie, a career officer known for her extensive contacts and shrewd political assessments in the Arab world, was confronted with an explosion of joy in Baghdad. Two things impressed her greatly in those delirious days and nights: the tremendous control of Saddam Hussein, who decreed after the first night that there would be no more joy-shooting into the sky as part of the popular celebration, after which that widespread practice stopped suddenly and completely; and the very high human costs of the war, which had inflicted losses in just about every Iraqi family she came to know. There was another loss as well, which would play a role in generating Iraq's next military conflict: The war with Iran, by U.S. estimates, had cost Iraq about $500 billion. Iraq emerged from the conflict with debts of $80 billion -- about 1 1/2 times its gross national product -- including at least $30 billion in short-term debt that had to be repaid to Europe, Japan and the United States in dollars or other hard currencies.

During most of the war, the United States, while professing neutrality, had tilted toward Iraq out of fear that an Iranian victory would spread Islamic fundamentalism throughout the Middle East. Except for the hidden flirtation with Tehran that was revealed during the Iran-contra scandal, the Reagan administration did all it could short of direct involvement or weapons sales to make sure that Iraq did not lose the war. It resumed diplomatic relations with Iraq after a 17-year rupture, removed it from a list of nations judged to be supporting international terrorism, secretly supplied it with U.S. intelligence information and openly granted U.S. agricultural credit guarantees and Export-Import Bank financing.

The unexpected end to the war in August 1988 came in the final months of the Reagan administration, an awkward time for reconsideration of U.S. policy. And the Persian Gulf lacked a high priority with the new administration, which did not complete its policy review for the region until nine months after President Bush took office.

"Access to the Persian Gulf and the key friendly states in the area is vital to U.S. national security," said National Security Directive 26, signed by Bush in October 1989, as the basis for U.S. policy. The designation of the area as "vital" -- an uncommon description in such top-level policy papers -- led to a logical consequence: "The United States remains committed to defend its vital interests in the region, if necessary and appropriate through the use of U.S. military force, against the Soviet Union or any other regional power with interests inimical to our own."

Regarding Iraq, an important and potentially rich country with the world's second-largest proven oil reserves, the underlying premise was that Baghdad had emerged from the war prepared to play a more constructive international role. The central assumption of U.S. policy was that normal relations with Iraq would serve long-term American interests and promote stability in the Persian Gulf and the Middle East generally. The directive recognized that there were significant differences over chemical and biological weapons, and important U.S. concerns about Iraq's nuclear program. The state of human rights in Iraq was acknowledged to be a problem, as was Iraqi meddling in Lebanon and other Mideast areas. The thrust of the Bush directive, however, was that the United States should keep trying to use political and economic incentives to moderate Iraq's behavior and increase American influence. Specifically, U.S. companies would be encouraged to participate in the postwar reconstruction of Iraq, particularly in the energy area, as long as this did not conflict with U.S. concern about nuclear proliferation. There were suggestions in Bush's directive, one source said, that U.S. activities in Iraq might influence various segments of Iraqi society to moderate the brutal totalitarianism that had been evident in the past.

With U.S. policy in place, the Bush administration's first high-level meeting with Iraq occurred on October 6, 1989, when Foreign Minister Aziz came to Washington to meet Secretary of State Baker. In a presentation that surprised the Americans, Aziz accused the United States of being hostile toward Iraq and of "mounting a campaign" to punish and belittle the Iraqi state. Baker denied that there was any U.S. hostility toward Iraq, according to a State Department official who examined a transcript of the meeting, but told Aziz that "we have problems with your human rights practices because of the differences between your values and ours."

Iraqi Ambassador Mohamed Mashat said later that at the time of the meeting, "we had information that some authorities in the United States were working to destabilize Iraq" by sending emissaries to nearby Arab countries in the gulf and "planting fear of Iraq in the heads of the sheiks." This notion may have arisen from periodic briefings given to friendly Arab states by the U.S. military's Central Command, which had protected reflagged Kuwaiti oil tankers during the Iran-Iraq war and was looking for a postwar mission in the Middle East. According to a U.S. intelligence official, these briefings identified Iraq as a potential threat in the region.

Despite the Iraqi accusations, Aziz asked Baker in the meeting to approve new U.S. credit guarantees for Iraqi food purchases from the United States. Such Commodity Credit Corp. guarantees, which had begun in 1983, had made Iraq the biggest single overseas purchaser of U.S. rice and one of the largest importers of U.S. corn, wheat and other grains. The following month, the administration provided Iraq with an additional $500 million in agricultural sales credits. After Aziz's visit, the State Department recommended that Bush override congressional objections to continuing U.S. Export-Import Bank financing for commercial transactions with Iraq. In his January 17 order, Bush did so, certifying that to halt the Ex-Im guarantees would be "not in the national interest of the United States."

"That was the high-water mark of our cooperative efforts with the Iraqis," said a senior State Department official. "It was really downhill from that point forward." Disturbing Signals

In the early weeks of 1990, the National Security Council staff director for Middle East affairs, Richard Haass, felt "a growing disquiet" that U.S. policy toward Iraq wasn't working quite as expected. At the suggestion of Haass, a former Rhodes scholar who had been a mid-level Defense and State Department official in the Carter and Reagan administrations, an interagency group held several meetings at the State Department to discuss whether the policy of limited cooperation with Iraq required adjustments. The discussions were not aimed at reversing the policy, according to a participant, but rather at sensitizing the bureaucracy, several rungs below the senior policymakers, to pay more attention to what was going on in Baghdad.

About the same time, Rick Herrmann and Steve Grummon, two junior aides on the Policy Planning Staff at State, were writing internal papers arguing that the policy was not just flawed in its execution but fundamentally wrong. One of their papers, "Containing Iraq," went to Policy Planning Director Dennis Ross, one of the handful of close Baker aides in a position to get an immediate and serious hearing from the secretary. The paper asserted that Iraq had emerged from the war much stronger than Iran and argued -- in contrast to the prevailing administration view that Tehran was the focal point of danger -- that Saddam Hussein's regime was the main threat to stability in the area and should be contained. Ross found the argument persuasive, but he did not act on it. As Baker's key aide on both Soviet and Middle East policy, he was preoccupied with the reunification of Germany and the drive to get Israeli-Palestinian negotiations going.

It was an outburst by Saddam himself that began to get the administration's attention. On February 24, just 12 days after his visit from Assistant Secretary of State Kelly, he spoke to a summit of the Arab Cooperation Council in Amman, Jordan. In those few days, the Iraqi president seemed to have made up his mind that the Americans' new "free hand" to maneuver in the Middle East, which he had described to Kelly, was inimical to Iraq. A bitterly critical Saddam declared there was "a real possibility" that in the next five years Israel would embark on "new stupidities" in the area as a result of encouragement by the United States now that it was in "a superior position in international politics." And he called for the U.S. fleet, which had operated in the area for more than 40 years, to go home now that Iraq's war with Iran had come to an end.

In Baghdad, anxious Arab diplomats called on Ambassador Glaspie to ask what had suddenly gone wrong in U.S.-Iraqi relations. Glaspie told them she was mystified. At the State Department in Washington, John Kelly was surprised and puzzled. While Foreign Minister Aziz had challenged the U.S. intention to maintain naval forces in the area, Saddam had not brought this up in the January meeting. Moreover, the thrust of the Iraqi leader's remarks to Kelly had suggested a desire for better relations with Washington rather than more distant or even unfriendly ones. Kelly called in Ambassador Mashat and asked him why Saddam had made these pointed remarks. If Saddam had a problem with the United States or a point to make, Kelly asked, why had he not discussed it when Kelly was there? If it had emerged in the few days after the visit, why had it not been taken up through diplomatic channels before a public blast? On Washington's instructions, the same questions were put to the Iraqi Foreign Ministry by Glaspie.

From the State Department's viewpoint, there was no satisfactory answer from the Iraqis. It was noted, though, that two things had happened between Kelly's departure from Baghdad and Saddam's speech in Amman. One was the issuance on February 21 of the annual State Department Human Rights Report. Kelly, however, had warned Saddam and Aziz that this negative assessment was coming, and their reactions had not suggested that it would cause a serious rift.

The other intervening event, which Iraqi officials later told Glaspie had been a source of great indignation, was a Voice of America editorial broadcast in Arabic and other languages on February 15, which had not been seen in advance by the State Department and had hardly been noticed in Washington. The editorial, which stated that it was "reflecting the views of the U.S. government," criticized secret police abuses in Iraq and seven other countries. "The rulers of these countries hold power by force and fear, not by the consent of the governed . . . the tide of history is against such rulers. The 1990s should belong not to the dictators and secret police, but to the people," the editorial said.

Glaspie believed that Saddam had been supplied by aides with a recording or the text of the editorial and was infuriated. The Iraqi leaders "read the editorial as USG {U.S. government} sanctioned mudslinging with the intent to incite revolution," Glaspie informed Washington in a cable obtained under the Freedom of Information Act by New York Times columnist William Safire. Glaspie then wrote Aziz a statement of "regret" that the editorial left open an incorrect interpretation: "It is absolutely not United States policy to question the legitimacy of the government of Iraq nor interfere in any way with the domestic concerns of the Iraqi people and government." According to a VOA official, the editorial was sharply attacked at a State Department meeting attended by Baker and Kelly, and new procedures were put in place for advance State Department clearance of all VOA editorials dealing with the sensitive subject of Iraq.

Still, those officials who were aware of Saddam's outburst against the United States were puzzled. Could a human rights report or a Voice of America editorial make so much difference to a dictatorial ruler? 'The Spring of Bad Behavior'

In early March 1990, several weeks after Saddam's Amman speech, former assistant secretary of state Richard Murphy visited Baghdad as an adviser to a Los Angeles-based international bank. Murphy, who was John Kelly's predecessor at State and who had spent a lifetime in Middle East diplomacy, quickly detected that something had changed in the Iraqi attitude toward the outside world. Foreign Minister Aziz and every other senior official Murphy saw told him that Israel was preparing to attack Iraq, as it had in 1981, when it launched a daring bombing raid against an Iraqi nuclear reactor. Murphy himself saw no sign of an impending Israeli attack, and no Iraqi official was able to cite evidence to back up the charge. Nevertheless, it was clear to him that Iraq's insistence that it was being threatened, and that the world was against it, would have consequences.

A second disturbing trend also engaged Murphy's attention. Since the end of the war with Iran, Iraq had made no effort to pay off its heavy debts and little effort to cut back either its million-man army -- the fourth largest in the world -- or its ambitious economic development program. The result was that, although Iraq was recognized everywhere as a potentially rich and viable country, it was piling up massive new debts; its credit rating was sinking and the interest rates on new loans had soared to 30 percent yearly. Saddam had adamantly rejected recommendations from foreign bankers that he reschedule Iraq's debts through a general negotiation with creditors. This procedure, known as a Paris Club, would have required secretive Iraq to open its books for the first time to outsiders.

As oil prices fell and Iraq's credit squeeze became even worse in early 1990, Murphy said later, "Saddam came to realize that he was being regarded as one of the world's worst credit risks and was facing bankruptcy" -- despite his own view of himself as a rising power in his region and even beyond. The former assistant secretary of state, and many others, now believe this frustration over money was at the root of Saddam's drive against wealthy Kuwait. "To get out of bankruptcy, you rob a bank," Murphy said.

Saddam's first target, though, was Israel. On March 9, Iraq suddenly brought to trial an Iranian-born journalist for the London Observer, Farzad Bazoft, who had been arrested five months earlier for investigating an explosion at an Iraqi missile plant, and charged him with spying for Israel. Despite appeals for clemency from Britain and elsewhere, Bazoft was sentenced to death and executed within a week, an act that earned Saddam worldwide condemnation. Later that month, two more sensational stories broke. One was the assassination in Brussels of Gerald Bull, a naturalized American who had been helping Iraq manufacture the longest-range artillery piece in history, dubbed "the supergun." Senior Israeli intelligence officials, confirming what was rumored at the time, have recently claimed responsibility for the slaying. Shortly after Bull's murder, U.S. and British authorities culminated a lengthy sting operation by arresting Iraqi agents who had sought to obtain sophisticated capacitors, electrical devices that could be used in nuclear and missile technology.

Perhaps the most serious source of tension, though, was not publicly announced. Early in March, U.S. intelligence detected the construction of six fixed launchers for long-range Scud missiles at an Iraqi base near the Jordanian border, placing these weapons within range of Israel. A CIA report said that the launchers, which could easily be observed by U.S. satellites, were intended as a blunt statement by Iraq that it would retaliate against any Israeli attack on its chemical weapons or nuclear installations.

In an emotional speech at a military ceremony on April 1, Saddam made the threat explicit. After announcing that Iraq had developed binary chemical weapons previously possessed only by the United States and the Soviet Union, he discussed the Bazoft, Bull and capacitor cases in rambling fashion. Then suddenly he warned Israel against striking at Iraqi plants. If Iraq is attacked, Saddam declared, "by God, we will make the fire eat up half of Israel."

Unlike Saddam's complaints about the United States in February or the troublesome events of March, the sensational threat to burn Israel brought Iraq to the attention of top policymakers and onto the front pages of newspapers. The Iraqi leader was hailed in the Arab world for standing up to Israel. In Washington, however, State Department spokesman Margaret Tutwiler called Saddam's remarks "inflammatory, irresponsible and outrageous." A White House statement called the remarks "deplorable and irresponsible."

As the Western reaction rolled in, Saddam telephoned King Fahd of Saudi Arabia and asked him to send an emissary who could speak authoritatively on his behalf to Bush and British Prime Minister Margaret Thatcher. Fahd sent his ambassador to the United States, Prince Bandar bin Sultan, the son of the kingdom's third-ranking royal figure, who has often been used as a confidential emissary. On April 5, Bandar flew to Baghdad and was taken in an Iraqi plane to meet Saddam in Mosul, north of the capital.

In a four-hour discussion, from which Bandar made 18 pages of notes, the Iraqi president asked the ambassador personally to assure Bush and Thatcher that he wanted good relations with the West and had no intention of attacking Israel. Instead, he was interested in obtaining their guarantee that Israel would not strike him.

Saddam made the point that when Israel destroyed the Iraqi nuclear reactor in June 1981, he did not retaliate because Iraq was at war with Iran. This time, he said, he would definitely retaliate against any attack. If he did not do so, Saddam claimed, he would not remain in office as president for six hours. In the strongest terms, he repeated that he would not initiate a strike against Israel but would only respond.

In that case, the Saudi ambassador asked, why had he made the public statement that caused such a worldwide reaction?

It was for "a different reason" from what was assumed, Saddam replied. Since Israel and the West were plotting against him and the Western media were attacking him constantly, "I must have my people mobilized to defeat this." The way to mobilize Iraqis was to announce that he would burn half of Israel if attacked, the president continued. "If I mobilize my people, I will be ready for whatever develops." Bandar would later kick himself for not realizing that Saddam's plans for mobilization could endanger countries closer at hand than Israel.

Toward the end of the meeting, Saddam dealt directly with the possible Iraqi threat to other Arab states. He said he wished to send a special message to King Fahd about "rumors in imperialist and Zionist circles that Iraq has evil intentions toward its neighbors" in the Persian Gulf. The rumors were untrue, he declared, and the Saudi monarch should not believe them.

Bandar took the messages to Fahd, Thatcher and Bush as requested. Thatcher, especially, was skeptical of Saddam's intentions, saying that Saddam was hardly believable. According to a Saudi source, Bush was upset by Saddam's threats and told Bandar, "If he doesn't mean to attack, why does he say these things?" Bush reportedly also told the Saudi ambassador, "We don't want anybody to attack anybody," suggesting an effort to restrain Israel as well as Iraq.

On April 12, five U.S. senators -- led by Senate Minority Leader Bob Dole -- made a now-famous visit to Saddam in Mosul. According to a transcript published by the Iraqis, Saddam charged that "an all-out campaign is being waged against us in America and the countries of Europe" in order to provide political cover for Israel to attack. He also criticized the United States for furnishing Israel with Patriot missiles after Iraq's offensive missile capability had become known.

Before flying to Iraq, the senators had telephoned Bush from another Middle East stop to assure themselves of his approval of their visit, in view of the controversy that had erupted following Saddam's threats to attack Israel with chemical weapons. Dole told Saddam, according to the transcript, that Bush had assured him personally only 12 hours earlier that he was pleased with their visit and "that he wants better relations, and that the U.S. government wants better relations with Iraq."

In Washington, concern had been building throughout "the spring of bad behavior," as Assistant Secretary of State Kelly called it, that Iraq was a much more difficult case than had been expected. After the "burn Israel" speech, pressure mounted from Israel's friends in Congress to legislate sanctions, including an end to U.S.-guaranteed agricultural sales, while the agricultural lobby mounted a campaign to preserve the sales on the grounds that other countries would simply get Iraq's business if they were canceled. Still, the unhappiness with Saddam was seen largely in the context of a threat to Israel rather than a threat against Arab neighbors. "It never occurred to us that they would take Kuwait," said a State Department official who was closely following the situation.

On April 16, the interagency Deputies Committee, headed by Deputy National Security Adviser Robert Gates, met at the White House for the first time to reconsider U.S. policy toward Iraq. Speaking for the State Department, Under Secretary of State Robert Kimmitt said Iraq's recent behavior no longer justified government-guaranteed rice and other grain sales, or government-backed Export-Import Bank credits. On the other hand, State continued to oppose the drive in Congress to cut off these benefits through legislation, on grounds that this would tie the administration's hands when and if the time came to renew them. Others at the meeting, according to a participant, argued that the credit programs should go forward because "all we would be doing is hurting U.S. rice producers and U.S. firms looking for business."

Some officials at State were disappointed that the meeting ended without a decision to terminate the credit programs. A Commerce Department official complained privately that "nothing was decided" at the the meeting. However, Kimmitt left the meeting believing that, without State's support, no additional benefits for Iraq could receive interagency approval to go forward -- and in fact, none did. Saddam subsequently complained that the United States had decided to starve Iraq.

The discussions at this and another Deputies Committee meeting at the end of May removed several of the inducements to Iraq for closer U.S. ties, but they did not fundamentally reverse the U.S. policy of seeking to improve relations with Baghdad. By the spring of 1990, "the realization was that {the policy} was perfectly right to try but that it wasn't working," said a senior official monitoring the situation. "If we had opened the window somewhat toward Iraq {in 1989}, it was time to start narrowing, though not shutting, that window."

Testifying on Capitol Hill 10 days after the first Deputies Committee meeting, Kelly called Iraq "an important and difficult country which poses a challenge to American foreign policy," but he declared that it remained important to provide an opportunity for Iraq "to demonstrate that it does, indeed, wish to reverse this deterioration in relations." Rep. Tom Lantos (D-Calif.) said he detected an "Alice in Wonderland" quality in Kelly's testimony. "You sort of expressed a hope, which boggles my mind, that somehow . . . Iraq under Saddam Hussein will turn in the direction of being a responsible and civilized and peace-loving and constructive member of the international community. And I find this, to put it mildly, a non sequitur," Lantos said.

At the end of May, the administration received the first clear indication that Iraq's target might be an Arab state in the Persian Gulf rather than Israel. During the Arab League summit meeting in Baghdad on May 30, Saddam called in a group of Arab heads of state and complained bitterly of "economic warfare" being waged against him by Kuwait, according to a variety of sources. On that occasion, recalled Iraqi Ambassador Mashat, "our president warned the Kuwaitis, 'You are wrecking our means of sustenance, and if you cut people's means of sustenance, it is equivalent to cutting their neck and killing them.' " A former U.S. diplomat with long experience and good contacts in the area said there was a sharp confrontation between Saddam and the emir of Kuwait, Sheik Jabir Ahmed Sabah, who flatly rejected Saddam's demand for billions of dollars in reparations and territorial concessions. "My view is this was a watershed," said the American source. In hindsight, he added, "there is some evidence that Iraq began serious invasion planning at that time."

In Washington, however, nobody was paying much attention. The day of the Arab summit in Baghdad, U.S. officialdom was focused on Mikhail Gorbachev's arrival in the U.S. capital for a four-day summit meeting with Bush. Neither the Washington Post nor New York Times reports on the Arab League meeting mentioned the Iraqi threats against Kuwait, which were made in a private meeting out of earshot of the press. Even when news of Saddam's challenge to his neighbor filtered back to official circles, it sparked only passing interest.

Before mid-summer, said a senior administration official with Middle East responsibility, "you had all these pieces of stuff, all these speeches and behavior that one didn't like" from Iraq, but nobody rang an alarm bell or otherwise called for urgent attention. The official, who is in position to see all U.S. intelligence about the region, said that before mid-July he saw or heard no predictions from any agency or official of an Iraqi attack on Kuwait. The Big Push

On Friday, July 20, a foreign military attache was traveling along the six-lane highway from Kuwait City to Baghdad when he encountered a remarkable sight: hundreds of Iraqi military vehicles filled with troops and weapons moving south toward the Kuwaiti border. The startled attache counted more than 2,000 vehicles on the road, transporting what turned out to be two divisions of the Republican Guard, Iraq's best troops. Within a few hours of the report, U.S. spy satellites had aimed their cameras at the border area, and analysts estimated that Iraq had moved 30,000 troops to positions near Kuwait. Kuwait's entire army was only about 20,000 men.

Iraq made little effort to hide the troop movements; either through inadvertence or on purpose, it had given the attache permission to be on the road when its troops were on the move. In the days to come, as the buildup along the border steadily rose to more than 100,000 troops, Iraqi tanks were loaded onto railroad cars in Baghdad within sight of main streets where passersby, including foreign diplomats, could easily observe them.

The very openness of the Iraqi military buildup and the nature of the political backdrop led most observers to believe that its purpose was intimidation of Kuwait rather than invasion. "The Iraqis are just flexing their muscles, and this is designed for political effect," an Arab diplomat said after receiving a U.S. intelligence briefing on the troop movements. The initial judgment of nearly all foreign governments was that Saddam was pressuring Kuwait to comply with its economic and territorial demands, not planning to seize the country.

The political buildup had begun several days before the troop movements with a two-pronged Iraqi campaign. On July 16, Foreign Minister Aziz sent a letter to the Arab League accusing Kuwait and the United Arab Emirates of "direct aggression" by exceeding their OPEC oil production quotas in a manner that brought world petroleum prices down. Kuwait was charged with "twofold aggression" for "stealing" $2.4 billion in Iraqi oil from an oil field that straddles the Kuwait-Iraq border. The Aziz letter was not made public for several days; to the dismay of the State Department, no Arab country informed the United States about it.

The other part of the campaign was public from the start: a speech by Saddam to the Iraqi people on July 17 accusing unnamed gulf Arab states -- widely identified as Kuwait and the U.A.E. -- of stabbing Iraq in the back with "a poison dagger" by overproducing oil. Saddam charged this was part of a plan "inspired by America to undermine Arab interests and security." If words do not remedy the situation, Saddam warned, "something effective must be done."

Beginning with July 18, the day following Saddam's speech, either the State Department or the U.S. Embassy in Baghdad presented Iraq with formal demands for clarification every day for a week, except for the Islamic holy day of Friday, when the Iraqi Foreign Ministry is closed. A number of these diplomatic inquiries also warned that the United States would defend its interests in the region. In Washington, State Department spokesman Richard Boucher said the United States was "strongly committed to supporting the individual and collective self-defense of our friends in the gulf with whom we have deep and longstanding ties." Under questioning, he would not say whether the United States would provide military help to its friends in case of an Iraqi attack.

In response to the Iraqi troop movements, Kuwait on July 20 placed its armed forces on alert. Officials of the United Arab Emirates, in an unprecedented move, on July 21 asked the United States for a demonstration of U.S. military backing for its independence. The Pentagon, which long had been seeking closer military ties with the U.A.E., was ready to respond immediately with a joint Air Force refueling exercise of the two nations. At the State Department, the Near East Bureau initially recommended caution, and Under Secretary Kimmitt asked for time to establish that the request came from the top leadership of the U.A.E. Kimmitt also asked about the attitude of other friendly countries in the area, and specifically if Saudi Arabia might wish to join the operation.

When the word came back from the U.A.E. that its top leaders agreed with the request, and when the Saudis were not receptive, the joint military exercise involving two U.S. aerial tankers and a U.S. cargo transport plane was authorized on July 23. At the same time, the Pentagon dispatched the six warships of its Middle East task force to positions closer to Kuwait and the U.A.E. According to a senior State Department official, Kuwait cautioned the United States against doing anything "militarily or rhetorically" to upset Saddam or give him cause to take military action. Kuwait persisted in this cautious attitude right up to the day of the invasion, the official said.

Under Secretary of State Kimmitt, a West Point graduate who served on the Carter and Reagan National Security Council staffs, was concerned that sending two aerial tankers might be just enough to embroil the United States without being taken seriously by Iraq. For this reason, he suggested that the aircraft carrier USS Independence and its accompanying battle group be deployed to the area as a show of force. The Pentagon demurred, however, suggesting that the Independence would need to stop for weapons familiarization at Diego Garcia, the U.S. base in the Indian Ocean, before heading into a potential battle zone.

On July 24, Egyptian President Hosni Mubarak flew to Baghdad and Kuwait in an attempt to mediate the dispute that had broken out. Mubarak said after returning to Cairo that Saddam had assured him he had "no intention" of invading Kuwait. The trouble in the gulf, according to Mubarak, was only a "summer cloud," the kind that in Egypt produces no rain. An Egyptian diplomat said the Iraqi president had also told Mubarak he intended "only to frighten Kuwait" into complying with oil production quotas and raising oil prices at an emergency OPEC meeting that had been convened in Geneva. At the suggestion of Mubarak and others, according to a Kuwaiti diplomat, Kuwait lowered its state of military alert in order not to provoke Saddam.

The same day, the U.S. military exercise with the U.A.E. was announced in Washington. Asked about it by reporters, Mubarak replied: "I call on the United States that we do not escalate the issue between two brotherly Arab states." State Department spokesman Margaret Tutwiler, in the strongest U.S. official statement prior to the invasion, said that "Iraq and others know that there is no place for coercion and intimidation in a civilized world" and called for a peaceful settlement. In response to questions, she also noted, "We do not have any defense treaties with Kuwait and there are no special defense or security commitments to Kuwait."

In Baghdad, Ambassador Glaspie, who had had no success in obtaining assurances from the Iraqi Foreign Ministry in her daily visits, took Tutwiler's statement and the announcement of the refueling exercise to Deputy Foreign Minister Nizar Hamdoon on the morning of July 25. She asked Hamdoon, who previously had been a highly successful Iraqi ambassador in Washington, to bring the statements to the personal attention of Saddam. Shortly after returning to the embassy, Glaspie received word that Hamdoon wanted to see her again. When she went back to the Foreign Ministry, Hamdoon escorted her to an official car to take her immediately to the Presidency. There she was ushered into the office of Saddam Hussein, who had never before met her privately in her nearly two years as U.S. ambassador in Baghdad. When she walked into the president's office, he was holding the statements from Washington in his hand.

Glaspie's interview with Saddam, which was subsequently made public in abridged form by the Iraqis, has given rise to great indignation about her overly friendly tone, her statement that the United States had "no opinion" on Iraq's border dispute with Kuwait, and her failure to warn the Iraqi president against taking military action. Glaspie, who was not accompanied by any aides to the unexpected meeting, did not take notes as the conversation proceeded but managed to write some notes on an envelope when Saddam stepped out of the room temporarily during the interview. A State Department official familiar with her reporting cable said that, while about 80 percent of the conversation was stated with substantial accuracy in the subsequent Iraqi transcript, the document omitted her strongest statements, such as a warning that the United States would protect its vital interests in the area, and also omitted Saddam's most explicit assurances addressed to Bush that he had no intention of attacking Kuwait.

Saddam appeared to be upset with the joint U.S.-U.A.E. military exercise in the area, accusing the United States of "flexing muscles and pressure" on behalf of Kuwait and the U.A.E. "If you use pressure, we will deploy pressure and force," said Saddam. "We know that you can harm us, although we do not threaten you. But we too can harm you . . . You can come to Iraq with aircraft and missiles, but do not push us to the point where we cease to care. And when we feel that you want to injure our pride and take away the Iraqis' chance of a high standard of living, then we will cease to care, and death will be the choice for us. Then we would not care if you fired 100 missiles for each missile we fired. Because without pride life would have no value."

While Glaspie was in his office, Saddam was called into the next room to take a telephone call from Mubarak, one of the series of calls, messages and visits involving senior Arab leaders seeking to resolve the crisis. When he returned, Saddam told Glaspie that the Kuwaiti crown prince and prime minister, Sheik Saad Abdullah Sabah, had agreed to meet the vice chairman of Iraq's ruling Revolutionary Command Council, Izzat Ibrahim, in Saudi Arabia to begin defusing the crisis. After a protocol beginning, the negotiations would then be transferred to Baghdad, Saddam said. He reported that he had given his word that "we are not going to do anything until we meet with them" and that if there is hope for resolving the crisis, "then nothing will happen." But he added, "if we are unable to find a solution, then it will be natural that Iraq will not accept death."

Glaspie left Saddam's office pleased that U.S. concern had finally gotten his attention in major fashion. She believed the situation would be peaceful at least through the Baghdad meetings with Kuwait. As it turned out, the preliminary discussions in Saudi Arabia broke down, and the Baghdad meetings never took place.

In Langley, Virginia, on July 25, the same day as Glaspie's meeting, the Central Intelligence Agency was reaching another set of judgments, mostly on the basis of Iraq's deployments. For the first time, the CIA estimated that Baghdad was not bluffing, but would probably use force against Kuwait. However, the agency did not expect that Saddam would seize the entire country, believing instead that Iraq would limit itself to disputed territory along the northern border.

The next several days saw a flurry of meetings and telephone calls. OPEC oil ministers in Geneva agreed on strict production and export limits to bring oil prices up, and Kuwait and the U.A.E. agreed to abide by them. The Senate, following less sweeping action in the House, voted to cut off all agricultural credits to Iraq and prohibit transfers of militarily useful technology. King Hussein of Jordan telephoned Bush twice, on July 28 and July 30, and, according to a U.S. official, "was extremely reassuring that this {quarrel} would be solved peacefully and Saddam Hussein would not resort to the use of military force." Mubarak and Fahd also communicated their view that the problem was being handled in an Arab fashion by the Arabs and that the United States should do nothing to upset the diplomatic apple cart. In Baghdad, Saddam's son-in-law and most powerful minister, Hassan Kamal, asked Glaspie to help obtain export licenses that were being blocked by the Commerce Department and, when she brought up the military buildup on the border, assured her, "We are not going to use the troops."

On the morning of August 1, the CIA obtained information that led it to conclude it was more likely than not that Iraq would invade Kuwait within 24 hours.

At 3 p.m. Assistant Secretary of State Kelly summoned Ambassador Mashat to his office. As the Iraqi ambassador settled into the sofa, Kelly delivered his message: "Mr. Ambassador, we know you have at least 100,000 troops on your border. This is extremely serious. It looks as though you are preparing aggressive action against Kuwait." Kelly reiterated the U.S. insistence that any differences must be resolved peacefully and asked the government of Iraq to pull back its troops from the border to defuse the growing chances of a military confrontation.

Mashat, according to a U.S. account, denied "any aggressive intention whatsoever" on the part of Iraq. He also said, "Any country has a sovereign right to deploy troops wherever it wants to within its frontiers."

Later that afternoon in a seventh-floor conference room at State, Under Secretary Kimmitt convened the last of several informal meetings of the interagency Deputies Committee to consider the Iraqi military buildup. Deputy National Security Adviser Gates, who normally chaired this group, was out of town on vacation. A crucial moment came when Kimmitt asked CIA Deputy Director Richard Kerr for a statement of the U.S. intelligence conclusions. Kerr, a 30-year veteran of the agency, responded that the CIA believed that within the next 24 hours Iraqi troops probably would cross the Kuwaiti border, at a minimum to the oil field in the north and to Bubiyan Island, which Iraq had long claimed. Kerr went on to say that the agency was uncertain whether Baghdad's troops would go farther, though they had the capability to take all of Kuwait without much difficulty. By the time the meeting ended about 6:30 p.m., a participant said, there was a consensus by the officials around the table that Iraq would act, but no consensus about how far it would go.

The NSC Middle East expert, Richard Haass, went from the meeting at State to the family quarters of the White House, where he and National Security Adviser Brent Scowcroft conferred with Bush. The three men discussed what was known from intelligence sources, what Arab leaders were telling them reassuringly, and what options there might be for U.S. action to stave off an attack. 'We Were Guilty of a Kind of Mind-Set'

As this article went to press, the United States and its allies had announced the end of their highly successful military campaign to expel Iraq from Kuwait. Many Americans had thought of little else for months as the international coalition to oust Iraq was painstakingly created, as the deadline for withdrawal was given by the United Nations and ignored by Iraq and as the battle erupted. The costs in human life, destruction of property and expenditure of public funds have been high, and the long-term consequences for the United States in the Persian Gulf and Middle East generally are still uncertain.

Whatever the successes of U.S. policy in the period since August 2, it is clear that the United States and world at large would have been far better off if Iraq's invasion of Kuwait could have been averted without bloodshed. But as we have seen, hardly anybody in the official circles of Washington and other allied capitals saw it coming until late in the day.

Asked why nobody saw the invasion approaching, one official here said he has taken many long walks pondering why neither he nor others added up the danger signals until it was too late. "It was an intelligence failure of sorts. We were guilty of a kind of mind-set or a framework" about Iraq, he said. "It might even be cultural. The idea that a country would march up to the border, put 100,000 troops there, go in and do what they've done; I don't think anybody here thought they'd do it."

Such a mind-set or fixed conception is among the classic pitfalls of intelligence and policymaking in dealing with the dangers of surprise attack. Many earlier cases illustrate the tendency to downgrade or dismiss troubling signs because -- in the logic of outsiders -- an attack does not seem to make sense. Such miscalculations contributed to the effectiveness and surprise of, among others, the Japanese attack on Pearl Harbor in 1941, the Chinese intervention in the Korean War in 1950, the Tet offensive in Vietnam in 1968 and the Egyptian attack against Israel in the Sinai in 1973.

Perhaps even more troubling in this case is the failure of the Bush administration even to focus on Iraq in serious fashion until nearly the eve of the invasion. During the first half of 1990, Bush, Baker and the relatively small inner circle that dominates foreign policymaking were preoccupied with what seemed much more urgent international issues, especially in the Soviet Union and Europe. "It's not that I didn't think the subject was important," said one senior policymaker who otherwise would have taken a major hand in policy toward Iraq, "and it's not just that I was heavily involved in many other things. It's just that there are only so many things you can direct your attention {to} and be working on . . . I didn't have the time."

Had the threat of destabilizing military action by Iraq been seen more clearly in Washington, the vital question is whether the United States could have headed it off by following different policies or issuing stronger warnings. Most of the half-dozen senior officials interviewed for this article said they believed, even in hindsight, that the United States could have done little that would have stopped Saddam, especially given that European powers were not alarmed and most of Iraq's Arab neighbors, including Saudi Arabia, Egypt, Jordan and Kuwait itself, did not believe that Baghdad would attack Kuwait. The Arab nations continued to counsel caution and patience until Iraqi troops rolled across the border.

Last-minute U.S. assertions of its interest in peaceful resolution of disputes seem to have had little impact in Baghdad. Diplomatic messages and the dispatch of the refueling tankers to the U.A.E. in the week before the attack got Saddam's attention, but do not appear to have made much difference. Before the invasion, it would not have been credible to Saddam -- or, for that matter, to officials of the administration in Washington -- for the United States to warn that it might send 500,000 troops and spearhead an unprecedented international effort to reverse the aggression.

Nonetheless, a few experts believe it possible that the attack might have been averted by prompt and strong warnings from Washington. Former assistant secretary of state Richard Murphy, who was the State Department's top Mideast expert in the last half of the Reagan administration, said, "It is conceivable that a very blunt, harsh threat -- you take one step toward Kuwait, and we'll clobber you" -- might have worked. A State Department career official with extensive Persian Gulf experience said that, in retrospect, Iraq should have been warned more clearly against the audacious idea of seizing Kuwait. "I believe we should have said that directly, very firmly, repeatedly and very publicly," this official said. But he conceded that he, like everyone else he knew in the U.S. government, did not expect Iraq to occupy Kuwait until it happened.

In the family quarters of the White House on the night of August 1 -- the early hours of August 2 in the Persian Gulf -- the president and his aides had little chance to ponder anything they might have done to avert the dangerous situation that confronted them. A little after 7 p.m., the telephone rang. Under Secretary of State Kimmitt was on the line to say that gunfire had broken out in Kuwait City. About an hour later, the full-scale invasion by Iraq was confirmed.

Don Oberdorfer has covered U.S. diplomacy for The Washington Post for 15 years.