Saudi Arabia, occupying most of the Arabian Peninsula, between the Persian Gulf on the east and the Red Sea on the west, is a largely desert nation that has gained enormous economic and political importance because of its vast oil reserves, the largest known in the world.

It gained fabulous wealth in the 1970s as the world's leading oil exporter and embarked on an ambitious modernization plan that, because of the country's strict Islamic traditions, has been described as "modernization without westernization." But the slump of the world oil market has cut deeply into the country's revenues.

Saudi Arabia is the size of the United States east of the Mississippi, with a population of about 7 million. Its major cities are Riyadh, the capital, and Jeddah, the business and diplomatic center, and it is also the site of Islam's two holiest cities, Mecca and Medina, identified with the Prophet Mohammed. Land

The country is mostly arid desert, and, except for Riyadh, most of the population centers are on the Red Sea and Persian Gulf coasts. A mountain range rises on the Red Sea coast, but elsewhere the terrain is chiefly flat, especially in the vast, uninhabited Empty Quarter in the southeast. There are no permanent rivers or bodies of water, and less than 1 percent of the land is cultivated. Temperatures range to 120 in the summer and may drop to freezing in the winter, although snow is uncommon. People

The population includes approximately 2 million or more foreigners, who make up 67 percent of the work force. The Saudi people themselves are Arab by ancestry and were largely nomadic until recent years; now about 95 percent are settled. Virtually the entire Saudi population is Moslem, 85 percent of them Sunnis adhering to the puritanical Wahhabi sect, which dates to the 18th century, and the rest, living primarily in the Eastern Province, are Shiites. Strict Moslem tenets such as a firm ban on alcohol are enforced, and the public mixing of the sexes and the role of women are greatly limited. The literacy rate is 52 percent and life expectancy is 54 years. Government

After centuries of fragmented rule of the Arabian Peninsula by rival tribes and families, Saudi Arabia as it is now known was formed by King Abdul Aziz, also known as Ibn Saud, in 1932. Ibn Saud, whose Saudi ancestors had ruled much of the area from the mid-1700s until they were displaced by the Rashid family at the time of the Ottoman and Egyptian occupation, had recaptured Riyadh from the Rashidis in 1902 and began working toward unification. His son, Faisal, who became king in 1964, began the modernization of the country. Faisal was assassinated by a nephew in 1975 and was followed by two other sons of Ibn Saud -- Khalid, who died in 1982, and King Fahd, who rules now. Saudi Arabia is a traditional monarchy. There are no legislature or elections, and the king -- who in recent years has also served as prime minister of his Cabinet -- is supreme ruler and also the highest religious leader. In practice, however, the king consults widely with members of the huge royal family, whose princes have intermarried into all areas of the country, and decision-making is by consensus. The courts follow the sharia -- the Islamic legal code -- and tribal law. Economy

Despite recent moves toward diversification, Saudi Arabia's economy remains dependent almost completely on oil and petrochemicals, although other natural resources include iron ore, gold and copper. In the 1980s, investment also has been channeled into agriculture, the cement and fertilizer industries and light manufacturing. The gross domestic product for 1983 was $120 billion, with the per capita figure of $14,117 one of the highest in the world.