WITH SOVIET RECOGNITION of Yasir Arafat's Palestine Liberation Organization (PLO), the death of Egypt's President Sadat, and the battle in Congress over the sale of $8.5 billion in American arms for Saudi Arabia, the Middle East has become the focal point of American foreign policy.

In the first interview on the Middle East since he won the presidency, conducted in the Oval Office a few days before the Senate voted to sell AWACS to Saudi Arabia, Ronald Reagan reveals his strategy for bringing peace to that trouble area.

Q: In the aftermath of President Sadat's death, do you think Egypt will adopt a new foreign policy?

A: So far, every indication we have is that there won't be. After the funeral, Secretary of State Haig and others had top-level meetings with the new Egyptian leader. President Mubarak assured us he intends to continue and follow through with the plans laid out by President Sadat.

Q: What about America's policy?

A: Some people say we don't have a policy in the Mideast. In fact, we've always had a policy. There are people in the press who say you don't have a policy unless you keep telling them what you're doing, so they can put it on the front pages. I don't happen to believe that's a good way to conduct foreign policy. I believe in quiet diplomacy -- for example, the fact that we had the Saudis' help in arranging a cease-fire in Lebanon. We didn't have to get on the front page to do that. That was quiet diplomacy.

Q: What's your next step?

A: We'll continue what we've been doing, which is not to impose a settlement on the Mideast. We want to be in a position to help, wherever and whenever, we can, to build on the Camp David process and bring peace to the region.

Q: Did former President Nixon stay in the Mideast after Sadat's funeral as your representative?

A: No, he did not. The night he left here, when the three former presidents visited me at the White House before flying to the funeral, Mr. Nixon told me he was going to go on to Saudi Arabia. That's the first I knew of it, and there was no discussion of it at all.

Q: Do you think the Mideast is a powder keg?

A: Yes, it is.

Q: How will you defuse it?

A: Moderate Arab states like Egypt want peace, and Israel wants peace. Together, they can be a force to keep the biggest troublemaker in the world, the Soviet Union, from making mischief in the Mideast.

Q: As for the (West Bank) autonomy talks, what will you do if they don't succeed?

A: I'm just not going to believe they'll be unsuccessful. Our ambassadors are sitting in on those talks, evidence again that we want to help wherever we can.

Q: King Hussein (of Jordan) will make an official visit to Washington on Nov. 2, when you'll meet for the first time. Will you urge him to enter the autonomy talks?

A: Yes, I'd like to. That's an ultimate goal. You see, Trude, the choice is between an Israel that cannot live without maintaining massive military power, that is surrounded by nations which outnumber it 100 to 1, that is constantly aware of elements which refuse to recognize its right to be a nation, and an Israel that can live in peace surrounded by Arab neighbors who acknowledge Israel's right to exist and have treaties such as Egypt has with her now.

Q: Will you eventually involve the Palestine Liberation Organization in peace talks?

A: I don't like to talk just about the PLO because it is a self-declared voice of the Palestinian people. Whether it includes them or not, the Palestinian problem has to be solved, but it can't be solved until they are willing to acknowledge Israel's right to exist.

Q: But will we talk to the PLO?

A: I think this is part of what's at stake here. I think Saudi Arabia could be an element in this.

Q: You mean, to bring in the PLO?

A: Yes.

Q: And will you bring in the PLO through quiet Israel. Romberg described the plan as reaffirming support for U.N. Security Council resolution 242, which calls for recognition of the right of all Middle East states to live in peace. But the Saudis have never explicitly accepted 242.

The upshot is to leave in confusion whether the praise by Reagan and Haig foreshadows an intention to try and merge elements of the Saudi plan into the Camp David process or whether they were trying to bolster administration arguments that the Saudis are moving toward a moderate stance in the Arab-Israeli conflict. diplomacy?

A: I think a solution has to be found for their problem.

Q: So it means talking to them eventually, even if it is through quiet diplomacy?

A: Providing they are willing to recognize Israel's right to exist.

Q: Why do you feel you can't be a credible leader in foreign policy without the sales of AWACS to Saudi Arabia?

A: Because if what I propose doing is rejected, then I have no more bargaining power; I won't have any stature in trying to deal with those countries. They can look at me and say. "How can we believe what he says if he can't deliver?" This will be their attitude, and other friendly leaders among our allies have said that it's essential to avoid that.

Q: What specific assurances are there that the planes won't fall into enemy hands, or be used against Israel?

A: We'll work out understandings with Saudi Arabia about the sharing of information, and so forth. There are also security measures that will be taken with regard to the planes. It is all worked out. And of course, American personnel will be involved for a long time there in the training of air crews and the maintenance of the planes.

Q: Why is the sale in the interest of Israel as well as the U.S.?

A: Israel will benefit for two reasons. One, I think the greatest threat in the Mideast to both Israel and to the Arab nations is the Soviet Union. Now, we saw a few weeks ago the ability of planes from Iran -- low-flying planes -- to bomb the oil installations of Kuwait. With ground radar, there would be only two minutes warning of a similar attack aimed at the Saudi oilfields, so important to Japan, to our European allies and to ourselves. With the AWACS, they'll have enough warning time to get planes into the air and meet any attacker out over the Gulf to intercept them. That's a practical consideration for all of us. But I think the main reason that it's in Israel's interest is that we want to continue the peace-keeping process with them, and we believe that here the Saudis are most influential. We think this was proven by their help in bringing about the cease-fire in Lebanon. We intend to continue working with them toward involvement of themselves and the other moderate Arab states.

Saudi Arabia is a leader of the moderate Arab states. I believe the Saudis are the key to spreading the peace throughout the Mideast instead of just having it confined to Israel and Egypt. What is so difficult for many people opposed to the sale to understand, as they look fearfully at Saudi Arabia, is that Egypt, which had fought Israel, turned around and was the first to make peace and ally itself with Israel. Can't they believe this is possible for other nations as well? That other nations can do the same thing? That's what we want to do -- try and persuade those other nations to do that.

This is our policy in the Middle East: Our goal is, with the security of Israel in mind, to bring about peace in that troubled region. I can't go into specific detail, because I think we are better off if we keep it in the area of quiet diplomacy.

Q: How would you describe U.S.-Israeli relations?

A: Let me put it this way: When I sat in this office and talked with Israeli Prime Minister Begin and told him we wanted to go through with the AWACS sale and explained our reasons -- how we must involve other Arab states in the peace process, others that will do one day as Egypt did -- he was not upset by what we were doing, although he said he'd maintain his present position. But then we discussed at length the U.S. relationship with Israel. When he left here, he told people that he had the best understanding with the U.S. he ever had.

I believe this is true. Our relations are just fine. I wish the Israelis would understand they never had a better friend here in the Oval Office than they now have. I assured Mr. Begin that I recognize Israel is an ally and that from this relationship we both benefit.

Q: Why shouldn't the Israelis think AWACS is a threat to tn thheir security?

A: We see what's happening in Iran. We see the Soviets in Afghanistan. The Saudis are as fearful of the Soviets as the Israelis are and as we are. And they recognize their great vulnerability -- how simple it would be to put their single greatest asset, the oil industry, out of business. So they want to make sure that what happpened to Kuwait can't happen to them. These were Iranian planes that just sneaked over -- and hit their oil fields -- and Kuwait isn't in the war. The Saudis need this protection, and they've been most cooperative about the manner in which it will be used -- sharing the information they get with us. This will be beneficial to us, with our own aircraft and our own ships in the Gulf and Indian Ocean. So there is no way that it is any threat to Israel.

Q: What about charges by some senators that you're swapping favors for Senate votes on the AWACS?

A: There has been no arm twisting and there has been no offering of deals or swapping of favors. Absolutely not. I don't do that. We haven't done any of it and frankly, I'm disappointed in what some of the senators have stated.

Q: But is it worth the political capital you're spending?

A: Yes, it is, because if we don't keep on pursuing peace in the Mideast, who will?

Q: What about Senators Mark Hatfield and John Glenn? Why are they so strongly opposed to the AWACS sale?

A: I don't understand Sen. Glenn at all, and I certainly don't agree with his statements that we were using unwholesome tactics. That was absolutely a disortion of the truth. Sen. Glenn wants AWACS planes there -- only he wants them there under our control, totally. He believes they should be there for our security in protecting the Mideast. What he'd have us do is base American forces there or in a neighboring nation; and we haven't done that.

As for Sen. Hatfield, he is opposed to any arms sales. He believes the world would be better off if there were no arms. He is probably right -- except, how do we get there? We're going to try to negotiate some arms reductions with the Soviet Union. But he is just opposed to distributing arms to anyone. Of course, it's kind of strange to call the AWACS a weapon. It does not even have a popgun on board, and it is very vulnerable to any attack. The only thing it can do is turn tail and run.

Q: In your Oct. 1 press conference, you implied that Israel and the Israeli lobby in the U.S. were interfering with your foreign policy by opposing the AWACS sale to Saudi Arabia. Is that what you meant?

A: I know some people took it that way, but that was misinterpreted. I was terribly upset when I discovered that some Israeli supporters believed I was aiming at them. I was not, and I don't want anyone else to. During the AWACS debate, we never tried to make it "a choice between Reagan and Begin," as someone put it. There are some people who tell me that because of our position on the AWACS our foreign policy was being dictated by Saudi Arabia. All I wanted was an end to the kind of talk that says we're being dictated to by one country or the other. Actually, I was kind of aiming at the media which have been carrying stories of this kind. I want both sides to know that our foreign policy is being determined by us.

Q: One final question -- will the Mideast be different now without Israel's Moshe Dayan and Egypt's Anwar Sadat?

A: Yes, it will be, because those two men were great forces. But I don't mean that in a pessimistic sense. Of course, we'll miss them, but there are other leaders who are just as dedicated to peace.