WHEN ISRAEL returned the Sinai desert to Egypt in their peace treaty, it claimed and kept Taba, a 250-acre sliver of Red Sea beachfront -- and thus made Taba an irritation to Egyptian nationalism. Cairo cried foul, and demanded that the issue be put to binding international arbitration. In an important step forward, the Israelis have now agreed.

Prime Minister Shimon Peres of Labor finally coaxed his Likud coalition partners into accepting a package including Israel's agreement to combined conciliation and arbitration on Taba and Egypt's moving back toward neighborly relations -- returning its ambassador and so on. Cairo gets a fair crack at real estate of no particular value except that the Israelis had it. Jerusalem gets a new crack at the warming bilateral relations it regards as the essence of peace.

Of course, things will not be so neat. Israel's stiffness on Taba angered Egypt, but if there had been no Taba, Egypt would still have stiffened on its overall relationship with Israel. The real Egyptian grievance was not this patch of disputed sand but the stillborn condition of the Palestinian settlement anticipated in the Camp David accords. Egypt recovered Sinai in the peace treaty with Israel, which was also a part of Camp David, but it has yet to recover the honored place it covets in the Arab world, and cannot expect to do so while the Palestinian question remains unresolved.

Let us be optimistic and assume that Egypt will see its way to accepting the package now offered by Israel. That leaves major political tasks to be undertaken on both sides. Israel's is to grant that peace only with Egypt cannot possibly bring Israel the full, solid and secure relationship it has good reason to expect with its southern neighbor. Progress on the Palestinian issue takes two or three or four or more; it's not up to Israel alone. Movement on Taba, however, could add much-needed momentum to the stalemated "peace process."

Egypt's task is to realize that its failure to deliver important elements of peace with Israel -- trade, tourism, diplomatic exchanges, etc. -- has taken a heavy toll. Especially, it has put on the defensive those Israelis who would otherwise be leading efforts at compromise on the Palestinian issue. They have had to face charges that Israel yielded substantial tangible strategic and economic assets in the Sinai and got hardly more than a piece of paper in return. This is why Egyptian President Hosni Mubarak cannot hang back on the return of normal ties now that Israel has broken its internal deadlock on Taba.