When the mukhtars -- local leaders -- and city hall hangers-on gather in Acting Mayor Mustafa Natche's office each morning to sip thick Turkish coffee and discuss politics, filling the room with clouds of tobacco smoke, two names invariable are on their lips these days: Ariel Sharon and Mustafa Dudeen.

Sharon, the flamboyant new defense minister of Israel, comes up in conversation because he has become an enigma to many of the 1.3 million Palestinians of the West Bank and Gaza Strip since he introduced his much-heralded "relaxation" policy in the occupied territories in August.

Is he sincere about implementing genuine reform in the day-to-day occupation policies, as he says? Or, as many Palestinians suspect, has he only slipped a velvet glove over an iron fist?

Dudeen, who competes with Sharon as a principal topic of conversation, is leader of the Israeli-backed League of Villages and has been accused by many Palestinians of being a colloborationist of the Palestinian nationalist movement nurtured over the last five years by big city mayors in the occupied territories.

Sharon and Dudeen represent the most important parallel developments in the West Bank since the 1976 municipal elections, when radical mayors swept out of office the moderate, establishment mayors and brought openly the Palestine Liberation Organization openly into West Bank politics.

The convergence of these phenomena could determine the outcome of efforts by Israel, the United States and Egypt to find a formula for comprehensive peace in the Middle East.

In mid-August, "Defense Ministry sources" began leaking reports that Sharon had ordered more lenient treatment of Arabs in the occupied territories, including guidelines to Israeli soldiers to refrain from breaking into Arab schools to quell disturbances, to avoid collective punishment such as curfews and to deal with Arabs more humanely at roadblocks across the West Bank and Gaza Strip.

Because of Sharon's longtime reputation as a tough, uncompromising Army general, particularly when he ruthlessly cracked down on Palestinian resistance in the Gaza Strip in late 1960s, the reports of "relaxation" received wide attention here.

Questions about Sharon's new occupation approach intensified last week when the defense ministry announced plans to abolish the military government in the West Bank and Gaza -- which has ruled since Israel seized the territories in 1967 -- and replace it with a new Israeli civilian authority answerable to Sharon.

According to the plan, which is expected to be adopted soon by the Israeli Cabinet, the civilian authority will include some Palestinians in senior positions. The Army would retain security responsibility.

Throughout the West Bank and Gaza, the measures have been dismissed by Palestinian nationalists as cosmetic changes with no substantive effect on the occupation. Nablus Mayor Bassam Shaka, for instance, says the Sharon plan is a "desperate attempt to enlist Palestinians to serve the interests of Israel," and Hebron Mayor Natche says, "Whatever you call the government, it is an occupation government."

The mayors point out that coinciding with the general relaxation policy were new orders forbidding all the key nationalist figures in the West Bank and the top editors of the three leading Arabic newspapers from leaving their home towns or from making any statements to the public or to foreign journalists in support of the PLO.

Moreover, the military government issued orders forbidding West Bank cities from receiving money from the joint PLO-Jordan Committee, which has funneled up to half the funds budgeted by may West Bank cities, enabling them to build schools and provide other services that would have been unaffordable with the limited funds provided by the Israeli governement.

Natche complained that while the general relaxation orders received much publicity, the new restrictive orders have been largely overlooked by the press.

In East Jerusalem, a young PLO supporter, who asked that his name be withheld, mocked the new policy, saying, "We make fun of it. It means instead of being dragged from your car at a roadblock, a soldier will smile and say, 'Please get out.' "

But beneath the derision, many West Bank nationalists, when asked about the relaxation policies, show a trace of perplexity over Sharon's motives. Some say it was merely an Israeli propaganda ploy designed to smooth the way for two important meetings -- Begin's with President Reagan in Washington Sept. 9 and Sharon's with Egyptian autonomy negotiators in Cairo later that month. Others see it as part of a broader scheme to soften the Palestinians in preparation for a campaign to enlist backers of autonomy.

A few West Bank leaders see the Sharon plan as a clever ruse for putting into effect a strategy long proposed by former foreign minister Moshe Dayan -- the unilateral implementation of Palestinian autonomy over the objections of West Bank and Gaza nationalist leaders.

For their part, Israeli officials tend either to downplay the significance of the relaxation reforms or attempt to portray them as merely an effort to improve the quality of life for Palestinians in a benign occupation of the territories.

Prime Minister Menachem Begin has denied that the reforms reflect any drastic new change in policy and he similarly has rejected the notion that installing a civilian government in the West Bank and Gaza is a circuitous method of unilaterally imposing autonomy.

The man Sharon has asked to head the new West Bank-Gaza civilian administration, Menachem Milson, suggested that the Sharon plan may have long-range benefits. Milson, former Arab affairs adviser to the military government, also denied that the Sharon plan is a form of unilaterial automony.

"It appears from what I've heard that it is a gradual, controlled process that can be stopped at any moment if the results are not satisfactory. You can either stop the process altogether or change direction. Dayan's idea meant that Israel steps out altogether and could no longer intervene if results did not meet expectations."

Milson said the PLO, through intimidation, has stifled moderate voices in the West Bank, and that Israel, to reach peace, "must create conditions within which moderates in the territories will be able to express their views openly." That can be done, Milson says, only if Palestinian moderates are given "moral and political support against the extremists."

Potentially even more significant to the future of the West Bank political landscape is Mustafa Dudeen and his growing League of Villages.

Just 200 yards down the street from the Hebron municipal building, Dudeen presides over the league, which Milson helped conveive in 1978 when he still worked for the military governor.

The big stone building that houses the league's offices is hatec by West Bank nationalists like Nablus Mayor Shaka and Ramallah Mayor Karim Khalif, who point to the constant presence of Israeli soldiers guarding it as proof that Dudeen is a collaborator. Graffiti cover the walls of many Hebron buildings, declaring, "No to the Village League."

In fact, the nationalists say, Dudeen has always been a collaborator against his fellow Palestinians, since he joined the Palestine police under the British in 1944 and served 20 years in Cairo in the intelligence branch of the Egyptian Palestinian Affairs Department. By his own account, Dudeen lived in Cairo from 1945 to 1965, serving 15 years as an "adviser" to President Gamal Abdel Nasser.

Dudeen next moved to Amman, where his friend, Wasfi Tel, then prime minister, appointed him social welfare minister of Jordan. West Bank nationalists charge -- and Dudeen denies -- that he was personally involved in the massacre of 27 Palestinians from his own home town of Dura during the 1970 Black September battle of Taibeh, south of Amman, when Jordanian troops were expelling the PLO.

Tel was assassinated by the PLO in Cairo in 1972 and Dudeen returned to Hebron in 1976 when the Israelis approved his wife's application for family reunion.

In an interview, Dudeen denied charges by Natche and other West Bank nationists that the Israelis set up Dudeen's league as a collaborationist organization tom compete with the PLO-supporting mayors of Nablus, Ramallah, El Biera, Bethlehem, Gaza and other major cities in the occupied territories.

He also denied charges that the Israeli government, to strengthen the political voice of the 70 percent of Palestinians who live outside the cities and towns, had funneled municipal aid funds only to those villages that have joined the league in collaboration with the military government.

Dudeen said all 73 villages in the Hebron area are in the league and that Israel had given $6 million to them in the last 2 1/2 years. He said villages in the Ramallah and Bethlehem areas have joined the league and more near Jenin and Tulkarm will join soon.

Dudeen made no attempt to mask his close association with the military governor and he volunteered the information that he had just come from a Jewish New Year's party at the local military government headquarters. He also confirmed that his supporters have been given special permission to carry weapons to protect him, something almost unheard of for Palestinians on the West Bank.

"We are here to improve the villages' standard of living and we are doing it. We were not here for political purposes. That is only in the minds of a few mayors, who are nothing in in area," Dudeen said.

Rejecting the PLO as a legitimate representative of most West Bank residents, Dudeen said, "I believed terrorism is not the way to solve problems. Between the Mediterranean and the Jordan River there are two nations, Arabs and Jews. Nothing can change that. We should build a bridge of coexistence and trust over 30 years of hostility."

When asked if he felt the Israelis were using him to form a nucleus of Palestinians to join the autonomy talks, Dudeen replied, "At present, I wouldn't serve in the autonomy. Until this moment, this autonomy hasn't been clearly explained by Israel, Egypt and the United States. We are not at the present being called upon to participate."

But he said he would not rule out future participation by him and his followers. He praised Sharon's plan to demilitarize the government of the occupied territories and said that while he did not plan to take a senior post, because of his age, he would not rule out that possibility either.

Dudeen acknowledged that, as Natche had charged, he performs favors for Palestinians living in Hebron and gets results from the military governor more easily than Natche. But he denied that he performed these favors, such as granting travel permits, for political purposes, saying, "I'm here to help the people."

Dudeen said he is aware that he may be an assassinatiion target of the PLO any time, but he said he is not afraid.

"I've been exposed to these threats for many years. I know a lot about the Arab world, and how, when Arabs can't influenced a person with persuasion, they use violence. But any person who believes in a thing should do it. I won't stop," he said.

Besides, he added, "I have my tribe guarding my house all the time. I've no reason to be afraid."