Honduras and El Salvador formally agreed here yesterday to mediate the simmering border dispute that led to the brief "Soccer War" between the Central American nations in 1969.

The conflict is not over, however. While the two countries' foreign ministers were attending an OAS ceremony on their agreement, a news story arrived from San Salvador saying that invading Honduran troops had killed one peasant and wounded another on Saturday.

The two foreign ministers Alvaro Martinez of El Salvador and Hector Palma Galvez of Honduras, later confirmed the incident had taken place, but gave conflicting accounts of it. They insisted that their efforts for permanent peace along the border would not be interrupted.

While attempts to demarcate the 210-mile border trace back to 1642, the latest round began after the week-long conflict eight years ago - triggered by a disputed soccer match - that lead to a break in relations and closing of the frontier.

A year ago, with Secretary General Alejandro Orfila of the Organization of American States acting as moderator, the two nations reached a tenative accord on mediation. Now the agreement has been ratified by both sides.

The foreign ministers thanked the OAS for its patience and also asked it to assure that the shooting incident on Saturday is not repeated.The OAS maintains observers on the border.

"I do not believe the encounter had the endorsement of the Honduran government, we are both trying to maintain absolute harmony," said Martinez.

The Honduran foreign minister said he confirmed the casualties, citing a cable from the army commander, but he insisted that the locale was Honduran, "an area of frequent incidents and definitely not in El Salvador."

Orfila issued a statement welcoming the deposit of the instruments of ratification yesterday, putting stress on a chronic concern of the OAS, financing of the operation.

"The profound commitment of both nations to achieving a durable peace has been demonstrated," he said, "by their willingness to assume the full burden of the costs of the OAS peacekeeping mission. This is unprecedented . . ."

The next step is naming of a mediator, to be chosen in 10 days from a list of four Spanish-speaking jurists acceptable to both parties. It is thought likely that the mediator will ask for a definitive delineation of the border.

Population pressure on limited land is a fundamental cause of the recurring conflict. El Salvador, with more than 3 million people and a land area similar to New Jersey's, has seen a tenth of its population cross into more bountiful Honduras, as big as Ohio and with 2.7 million people. Hondurans resent the influx.

El Salvador's ruling class has been threatened recently by guerrilla groups demanding socialism and land reform. The foreign minister who signed the mediation pact here a year ago, Marico Borgonovo, was assassinated in May by revolutionaries.