Syrian President Hafez Assad, in Baghdad to smooth over a 12-year feud with neighboring Iraq, last night continued summit talks apparently aimed at securing military cooperation against Israel.

Arab diplomatic sources here were taking seriously the hints from both capitals that as a result of the Camp David accords, the two bitter rivals would agree on the deployment of Iraqi troops along the Golan Heights in Syria to form a united " eastern front " against Israel.

There were also indications that Palestinian guerrilla groups under Yasser Arafat would resolve their differences with Iraq as a result of President Assad's trip, his first to the Iraqi capital since the aftermath of the October 1973 Arab-Israeli war left Assad in a similar quandary over cooperation with Iraq.

Reports from Baghdad on the second day of the Syrian leader's visit quoted official sources as saying delegations led by Assad and Iraqi President Ahmed Hassan Bakr were continuing discussions of ways to counter the seperate peace being negotiated by Egypt and Israel.

THe talks were continuing late into the night and it was reported that the two sides had agreed to set up a working committee to pursue their cooperation after the summit ends.

Diplomatic sources here said any joint military decisions probably would not be announced in detail, if at all. In any case, they said, contingents of Iraqi troops, if dispatched to Syria as proposed, probably would amount to no more than a " symbolic " force to avoid provoking Israel.

Arab diplomats said both countries' growing concern over that prospect overshadowed their deep-seated policy disagreements, which apparently have not been resolved. In fact, the sources indicated, the two sides were not even discussing their differences over the principle of negotiating a settlement with the Israelis.

Syria accepts the concept of peace with Israel, but Iraq abhors it. The Baghdad regime, one of the most radical but consistent in the Arab world, demands the destruction of the Jewish state.

Other disputes have been fostered by rival wings of the Arab Baath Socialist Party, the ruling party in both Baghdad and Damascus. Those differences were also being glossed over, the sources said.

The emerging rapprochement between Syria and Iraq follows a decision by Assad earlier this week to reopen their common border and resume air traffic between the two countries.

That action followed recent offers from Baghdad to provide Iraqi troops for the Golan and to set up a $9 billion Arab fund to help the " confrontation states " against Israel. Those include Syria and Egypt (Cairo was offered $5 billion to drop its peace initiative) but not Iraq, which has no border with Israel.

Syria has expressed appreciation for the Iraqi offer of troops but has not committed itself to recieve them.

Underscoring the proposal, Iraqi Vice President Saddam Hussein, the country's strongman, was quoted yesterday by a government newspaper in Baghdad as saying, " We will discuss everything related to making Syria and Iraq a single military front. "

In Damascus, the state-controlled press rebutted the thesis that " there can be no war without Egypt. "

Despite the saber rattling, observers here said any joint " front " on the Golan Heights would probably be defensive, since Syria, with more than 30,000 men tied up in Lebanon, is considered to be in no position to wage war against Israel.

The cause of Arab unity got a further boost yesterday when a ranking official of the Palestine Liberation Organization suggested that the PLO may reach its own understanding with Baghdad to " frustate the dreams and plans of those who accepted the Camp David accords. "

PLO Executive Committee spokesman Abdel Muhsin Abu Maiezr said in Damascus that the success of the Syrain-Iraqi summit would " carry the confrontation to a more active level. "

The PLO has accused Iraq of conniving with radical Palestinian guerrilla groups to assassinate three relatively moderate PLO representatives this year. Yasser Arafat's Fatah group retaliated with a series of attacks last summer on Iraqi diplomatic targets in several countries.