THE LATESTPalestinian raid batters what is left of Middle East peace prospects at their most vulnerable point. Israelis intercepted, off Tel Aviv, several speedboats plainly bound on a mission of havoc. The Palestine Liberation Front promptly and proudly took responsibility. This time there is no doubt of a PLO connection. The PLF is a part of the PLO; its Abul Abbas sits on the PLO executive committee and has an office in the Tunis building where PLO chairman Yasser Arafat has an office. So far, however, Mr. Arafat has refused to condemn the act and expel those responsible for it, though this is how he promised to respond to terrorism when he opened a dialogue with the United States 18 months ago. His lapse has allowed Israel's Likud government, which was bitterly opposed to the dialogue from the start, to demand that Washington break it off.

If Mr. Arafat cannot bring himself to respond, the United States will have to do exactly that. A PLO that equivocates not only on terrorism but on its word betrays its claim to be either a partner for peace with Israel or a partner for diplomacy with the United States. It is relevant that the raid mounted off Tel Aviv had as its stated rationale retaliation for the 20 fatalities and 900 injuries of Palestinians suffered in recent West Bank-Gaza protests, themselves the sequel to a deranged Israeli's murder of seven Palestinians. But the acceptable response to this awful Palestinian toll cannot be an act of terrorism. It must be an act of peace.

The ruling Likud in Israel is trying to form a new government and it would take satisfaction and profit from a U.S.-PLO break. A break would put an end to the peace initiative that Likud put forward last year but soured on when it began to look as though it might work. By contrast, many in the opposition Labor Party, which is considerably readier than Likud for the risks of peace, would be deeply disappointed. Labor is not itself prepared to deal with the PLO, but it understands the value of having the PLO acquiesce privately to the precedent-setting Palestinian-Israeli meetings that the United States is still hoping to bring off publicly. Angry Palestinians and others call on Mr. Arafat not to abandon the PLF terrorists for an American connection that has brought Palestinians little to date. He is in a strange role -- custodian of Israel's prospects as well as the Palestinians' own.