In a major policy reversal, the United States had decided to accede to a Third World demand and offer to make a direct monetary contribution to the highly publicized "Common Fund" to help stabilize world commodity prices. The issue had become a sticking point in the North-South dialogue between the developing & developed world.

The Common Fund, first proposed in 1976, is designed to stabilize prices of some 18 commodities for which world prices often fluctuate widely.

The basic idea of proponents is that the Common Fund would protect both producer and consuming countries from harmful fluctuations in commodity prices.

Industrial countries believe the Common Fund to be one of the less important issues in the overall North-South dialogue, while acknowledging its usefulness. The willingness of the United States and other countries to go along now, with at least a modest Common Fund, recognizes that other outstanding issues are not likely to be settled until some form of Common Fund is in place.

Other issues include transfer to real resources, aid, distribution of technological knowhow, and increased access to the rich nation's markets for the Third World's manufactured products.

U.S. officials say issues such as these are at the heart of the North-South dialogue that has gone on between developing and developed countries for almost three years. They look upon the Common Fund issue as a test of the ability of the developing countries to reach a consensus among themselves on a concrete proposal that could point the way toward other areas of cooperation between the haves and the have-nots.

After much acrimony, the industrial countries had agreed in principle last year to the establishment of a Common Fund but had refused the poor nations' demand that the rich ones stake it to an initial capital of about $1 billion.

Instead, the United States had suggested that the fund receive deposits from existing individual commodity fund arrangements and be able to borrow additional money - but not set up an altogether new capital account.

"But it's been made clear that won't fly," a high U.S. official said in an interview, "so we are now prepared in principle to make a direct contribution."

The shift in the U.S. position was approved last month by President Carter, on the basis of a memo submitted by all affected U.S. agencies and after congressional consultations. It is now to be discussed at negotiations in Geneva.

The United States still has reservations on how the fund is to operate and is dubious about whether its proposal will be acceptable to the so-called Group of 77 nations negotiating on behalf of the Third World countries.

For one thing, the United States believes that the capital structure can be "significantly less" than the $500 million, a compromise figure proposed by Gamini Corea, secretary general of the United Nations Conference on Trade and Development (UNCTAD).

It was Corea who had originally proposed contributions of about $1 billion from the rich nations, or enough to support a fund of some $6 billion, counting deposits from individual commodity agreements and borrowings.

U.S. officials appear to have in mind a capital input from all industrial nations of perhaps half of the $500 millions with a U.S. contribution of less than 25 per cent of that. Officials would not name a number, but something over $50 million and less than $100 million would seem to be the range.

The U.S. trade share of the commodities involved is about 12 per cent, and the U.S. share of the United Nations costs - mentioned by some as a potential yardstick - is 25 percent.

The fund would be used to buy commodities when prices are low - forcing them up to an acceptable range - and storing them for sale when prices are high, thus bringing down the price to the acceptable range.

"In many ways," an official said, "the talks now being held in Geneva will provide a test of whether the Group of 77 can really negotiate as distinguised from presenting their demands." In effect, he suggested, if the Third World really wants a Common Fund, it can now have it.

The United States acknowledges that many other issues are involved beyond the precise size of the banking operation of the Common Fund.

The Third World countries have somewhat shifted their focus to deal with other measures that would help boost poor nations' commodity exports.

The United States would not object to "other measures" provided they do not overlap with other institutions. Officials cite as an acceptable "model" that could be applied to some other commodities the successful International World Secretariat, which has helped over the past 20 years to expand the market for wool.

U.S. officials say that despite the symbolic importance attached to the Common Fund, more importance attached to the Common Fund, there are more important avenues of aid for the Third World that get less attention. They cite the need for expansion the capital of the World Bank and securing trade concessions for the poor nations at the multi-lateral trade negotiations, also in process at Geneva.

Therefore, they say, the real significance of an agreement lies less in Common Fund itself than in "whether Third World will avoid the confrontation that has dominated the dialogue since 1976.

Among the Group of 77 there are in fact representatives of 120 countries, with diverse interests, and - according to the American assessment - no real leadership.