A Kissinger bargaining chip for Israel in the Sinai II agreement four years ago has grown into a troublesome touchstone of American policy in the Middle East, and this week U.N. Ambassador Andrew Young stumbled over it and fell from grace.

The confidential agreement not to "recognize or negotiate with the Palestine Liberation Organization" (PLO) has been honored by both the Gerald R. Ford and Jimmy Carter administrations since its signing on Sept. 1, 1975, but with varying interpretations to suit the circumstances and the political pressures of the moment.

Because there are so many murky aspects and gray areas in this unusual piece of statecraft, and because circumstances differ, these things have been possible:

U.S. diplomats in Beirut met with PLO representatives repeatedly during the Lebanese civil war in 1976, because the United States decided that the restrictions do not apply to "security situations involving American citizens."

Crown Prince Fahd of Saudi Arabia brought a paper from the PLO to a White House meeting with President Carter and Secretary of State Cyrus R. Vance in May 1977, in an effort to bring the Palestinians into Middle East bargaining. The paper, to observe the proprieties, was on a plain sheet of paper with no PLO heading.

PLO official Shafik Al Hout, director of the Beirut office, spoke to several U.S. officials at the Syrian National Day reception in Washington four months ago. PLO U.N. observer Zehdi Labib Terzi said yesterday that "we meet every day in parties and receptions" with American officials, but added that sensitive issues are not discussed.

U.S. Ambassador to Austria Milton Wolf met on two "social occasions" with PLO official Isa Sartawi in June and July of this year, and attended a business rendezvous with Sartawi at the PLO man's request.

Wolf filed cables to the State Department on the first two meetings, and gave a prompt report on the third meeting to Under Secretary of State David D. Newsom by overseas telephone call. Wolf was "reminded" of U.S. policy toward PLO contacts, but was not reprimanded. The case is closed, the State Department said yesterday.

Young's fatal flaw, in the reckoning of several diplomats, is that he did not tell his government of his meeting with PLO observer Terzi, and then lied when called to account for it by the Israelis. The Israeli intelligence arm, Mossad, is believed to have penetrated the PLO in elaborate fashion.

Another Young misfortune was to have undertaken his mission of persuasion at a time of soaring suspicion in Jerusalem about U.S. intentions regarding Palestinian issues. The heightened suspicion and public charges have brought about a tightening, at least for now, of the American definition of what PLO contacts are barred by the 1975 Kissinger memorandum.

The memorandum, signed by Henry A. Kisstnger and then foreign minister Yigal Allon if Israel, was among several side agreements provided as part of the price fo Israel's withdrawal from a slice of desert in the second Sinai disengagement agreement (Sinai II). It was negotiated in frantic haste, watered down to its final form from a much more constricting Israeli proposal in an all-night session just before the Israeli-Egyptian deal was struck.

This and other side agreements were not intended to be made public, but the text quickly leaked after their submissions as confidential documents to Congress.

Kissinger contended at the time that the agreement merely put into writing existing policy and intention, that the United States will not recognize or negotiate with the PLO as long as the PLO does not recognize Israel's right to exist and does not accept U.N. Resolutions 242 and 338.

The PLO question is of great importance and sensitivity for Israel, especially since the coming to power in 1976 of Prime Minister Mecachem Begin, who is determined not to withdraw from the West Bank lands, which are central to a settlement of the Palestinian issue.

Many Israeli politicians have met PLO officials, and Israeli governments are believed to have passed messages to the PLO on a large number of occasions.

The most influential mayors on the West Bank are known to be PLO figures, and they deal with Israeli officials daily.

The PLO is highly unpopular in Israel because of bombings, guerrilla war and fears about the future, and Begin is on the far end of the anti-PLO spectrum. This has had its influence on Washington's policy.

The Carter administration's policy, much more than Kissinger's under Nixon and Ford, initially centered its diplomacy on a comprehensive settlement of the Arab-Israeli dispute, which meant aiming squarely at the Palestinian problem. Despite some advice to the contrary, Carter decided early to continue in force the Kissinger memorandum on dealings with the PLO.

This meant if interpreted strictly, that the United States could not have dealings with the main Palestinian umbrella organization and central establishment on the most difficult issue under negotiation. Secretary of State Cyrus R. Vance, while saying that the U.S. diplomats continue to be restricted by the Kissinger document, privately called it "that damned agreement."

Carter has declared that the United States will not deal with the PLO, but the meaning of that is unclear. The State Department legal advisor, Herbert J. Hansell, said April 26 that there is "no inhibition on contact short of recognition or negotiations."

But State Department spokesman Thomas Reston said yesterday that "no substantive contact" with the PLO is allowed, a far different thing.

Since 1975, PLO diplomacy has expanded to 60 to 70 recognized missions throughout the world. American diplomats brush against PLO officials every day.

PLO Chairman Yasser Arafat has met for serious talk with several U.S. senators, including George McGovern (D-S.D.) and Howard H. Baker Jr. (R-Tenn.) and about 12 representatives. Other PLO officials have met with a longer list. Arafat and others have been interviewed by the press here on many occasions.

Rep. Paul Findley (R-Ill.), who has campaigned for U.S. contacts with the PLO, said yesterday that he had several telephone contacts with Arafat though the PLO leader's aide in the same week as Young's New York meeting, and in the same cause, a delay in the Palestinian debate at the United Nations. Findley said he believes his advice helped convince Arafat to grant the postponement being urgently requested by the U.S. executive branch.

Findley said that, in his opinion, Young did not violate the 1975 Kissinger memorandum, because he was not NEGOTIATING" with the PLO. Findley said, "In my opinion our executive branch has been meticulous in avoiding all discussions with the PLO." He said this is "a terrible stupidity" and should be changed.

Washington Post researcher Valarie Thomas contributed to this article.