The Palestinian guerrillas who man this 13th-century Crusader castle transformed into a mountaintop artillery redoubt can peer over the stone ramparts, across a jagged ridge and into the streets of Metualla in northern Israel.

Between them and the land they call Occupied Palestine lie only a few United Nations outposts and the towns and villages of "Free Lebanon," a Christian enclave carved out by the Israeli Army last year as a buffer zone and put under the niminal leadershop of renegade Lebanses Maj. Saad Haddad.

The spectacular panorama -- 1,000 feet down a precipice, across the Litani River far below and up again to the Christians' fortified hills standing guard over the Israeli border -- makes this position one of the most important Palestinian strongholds in southern Lebanon. It also provides a troubling perspective for viewing the diplomatic initiative being readied by the United States for solving the dangerous clash of interests that has made these rocky slopes a flash point for Middle East violence.

Fighting -- artillery exchanges broke out Thursday, Friday and yesterday -- has persisted here despite cease-fires and a U.N. peacekeeping force chiefly because it is the only spot where significant Palestinian military forces can still get close to the Israelis who they say have usurped their homeland.

The Palestinians' determination to combat their enemies and Israel's determination to crush their resistance flow from such a deep-running clash of national wills that, standing here, it is difficult to imagine how the abstractions of diplomacy can take root in the rugged border hills that have become their battleground.

The Palestinian commander here, a Fatah major who calls himself Alaa, expressed doubt that a new U.S. initiative will change the situation on the ground as long as the Lebanese government does not have the military strength to impose order along its border and no one else is willing or able to do it.

"I've heard about the U.S. initiative," he said. "But I haven't seen anything yet."

U.S. officials say the initiative amounts so far to little more than Washington's desire to try something in coordination with European, Arab, Lebanese, Israeli and Palestinian leaders. Veteran U.S. diplomat Philip Habib, whose ancestry is Lebanese, is expected in Beirut soon for exploratory contacts with President Elias Sarkis' government. A French envoy, Gabriel Robin, began a similar round of talks in the Lebanese capital yesterday.

Hopes already are rising in Beirut. The Lebanese have long been convinced that only big-power intervention, including contacts with Israel and reinforced international border supervision, can restore peace to the south after nearly four years of intermittent warfare.

Moreover, running through the U.S. efforts for some officials is the unspoken hope that if the southern Lebanon talks succeed in bringing so many Middle East actors into negotiations, they might somehow help lead to a parallel track for peace talks if the Camp David autonomy process runs into trouble.

Another vaguely defined goal is the possibility that, even dealing through third countries such as France, the United States and the Palestine Liberation Organization could slide from a dialogue on southern Lebanon into a dialogue on the West Bank and Gaza.

U.S. officials are careful not to talk openly of these facets of their effort, however, fearing they would become a swift kiss of death because of Arab opposition to the Egyptian-Israeli peace treaty and the autonomy talks set up under it.

Whatever the hopes of Lebanese or U.S. diplomats, however, the reality they have to deal with starts in and around this fortress with 155mm howitzers and 120mm and 180mm mortars pointed across the Litani River toward Haddad's forces and beyond them toward Israel.

The howitzers thundered yesterday down into the nearby Lebanese village of Deir Menass, killing by the Palestinians' count two persons and wounding two others.

"We regretted it, but we had to do it because they opened fire on us from the village," said Maj. Alaa.

Most artillery attacks on the Palestinians come from the town of Narjavoun, Haddad's headquarters on a ridge just in front of this fortress, and from Kalia, another Haddad-held town two miles down the spine of the ridge.

But yard-wide holes also gape in the ochre stone castle walls from what the guerrillas say are hits by Israel's own 175mm self-propelled cannons. The nearby town of Nabatiyeh also shows the damage of 175mm artillery hits during five months of intensive shelling last summer that turned the regional market into a ghost town.

Life has returned in the relative quiet since then. Palestinian officials who are the town's effective government say about 20 percent of Nabatiyeh's 40,000 inhabitants have come back home to try again. The market today bustled with shoppers picking from vegetables, fruit and freshly killed lambs.

"One hour they come back, the next hour when the shells fall they take off again," laughed Hassan Makhdas, a taxi driver who plies the three miles between Nabatiyeh and Kfar Tibnit. "Yesterday, the shells came down right by my car. I let out my passengers and went stright home to hide."

Makhdas and his fellow southern Lebanese have been caught in the crossfire between Israel and Haddad on one side and Palestinian guerillas with their Lebanese allies on the other.

Analysts estimate about one third of the PLO's approximately 22,000 armed guerillas operate in southern Lebanon. They are bolstered by about 1,000 holdovers from the Lebanese Arab army, a Moslem-based faction of the Lebanese army split away during the 1975-76 civil war under a young lieutenant, Ahmed Khatib.

Ranged against them are Haddad's estimated 400 rebel Lebanese Army regulars backed by about 700 militiamen from local Christian village and Christian Beirut. Their domain, a six-mile-deep strip about 60 miles along the border, is supplied, advised and armed by Israel.

Occasionally it also has been used as a firing platform for Israel's own artillery barrages against Palestinian concentrations in Lebanon.

Scattered through the confrontation lines are about 5,500 troops from eight nations in the United Nations Interim Force in Lebanon.

For more than a month now, the artillery exchanges have been limited to desultory blasts from one side or the other and the inevitable retaliation. The mass bombardments of last August that led to an exodus from southern Lebanon and heavy damage to the coastal town of Tyre have halted, U.N. observer reports show.

But the standoff that let to them remains, observers point out the Palestinians appear as determined as ever to retain their contact with Israel along the border. And Israel appears as reluctant as ever to trust U.N. or Lebanese forces with monitoring the border against guerilla attacks.