IN SUSPENDING the American dialogue with the PLO, President Bush did exactly what he had to do to fight the war on terrorism and to maintain American diplomatic credibility. Many Palestinians and others will feel deeply aggrieved at what they take to be conspicuous evidence of favor for Israel. But the PLO has it within its power to restore the dialogue simply by respecting the condition -- renunciation of terrorism -- it accepted when this fragile connection opened 18 months ago. Meanwhile, there are other channels in which the two can exchange views.

Israelis had pointed out that Mr. Bush could not expect to gain their full attention to diplomatic matters that concerned him until he had shown he was as good as his word in the battle against terrorism. Having acted, Mr. Bush is in an improved position to continue his diplomacy with Israel. In this effort, the clear priority is to establish whether the Israeli government is interested in the exchange of territory for peace on negotiated terms. This is the established international settlement formula, one that previous Israeli governments had accepted. Without an Israeli readiness to contemplate such an exchange, the pursuit of peace becomes pointless. Before the matter of dialogue with the PLO got hot, Washington had been searching for a way to start a process intended to lead into peace negotiations. The process may now be stalled, but it remains useful and necessary to probe whether the Shamir government shares the larger purpose or whether, as some suspect, it has its own strategy involving retention of the occupied territories and indefinite denial of political rights to Palestinians living there.

Some argue that the PLO has altogether disqualified itself from a Middle East role. The PLO made a serious tactical blunder for which it -- and others -- will now pay. But suspension does not diminish the PLO's centrality in the Palestinian national movement nor its place in the politics of the area. Sooner or later, the PLO, having no alternative way to serve its political objectives, must rejoin American diplomacy. In the Middle East it is always difficult to get the parties into phase, but one can hope that if the PLO does return, it will find waiting an Israeli government prepared to be a partner in peace.