KUWAIT, JAN. 3 -- Yasser Arafat today gave his clearest indication to date that the Palestine Liberation Organization soon would form a provisional government in exile and launch a major Middle East diplomatic peace initiative.

The PLO chairman was visibly buoyed by weeks of anti-Israel demonstrations by Palestinians in the occupied West Bank and Gaza Strip and by Arabs inside Israel.

"I think we must have this government" in exile, he said, although he remained uncommitted because of continuing discussions within PLO ranks about its advisability.

Creation of such a provisional government would be accompanied, he said in an interview, by "no doubt a major new political platform" designed to remove longstanding U.S. -- and Israeli -- opposition to dealing openly with the PLO. The United States has demanded that the PLO recognize Israel's right to exist and renounce terrorism before Washington will deal with the organization.

In response to repeated questions, Arafat did not rule out formally recognizing Israel within the borders it had before seizing the West Bank and Gaza Strip in the 1967 Arab-Israeli war.

Such recognition would be a key concession, which the PLO has refused to make in pressing its own demand for a Palestinian state on any territory relinquished by Israel under a peace settlement.

Arafat said that "if the Israelis are worried about {such a} small, new state, I accept in the name of my people the presence of United Nations forces for any period" that Israel requires on the Palestinian side of the border -- "not on their side because we do not want to give them any excuse to refuse."

Aides to Arafat said the plan for a provisional government -- or executive branch to the Palestine National Council, the PLO's self-styled parliament in exile -- was similar to a less-detailed plan that the PLO suggested about six months ago.

During the the two-hour, middle-of-the-night interview, Arafat expressed a note of optimism only two months after the PLO was all but ignored at an Arab League summit in Amman, Jordan.

The interview, conducted in English, was frequently interrupted to allow Arafat to keep in touch with news of yesterday's Israeli attacks against Palestinian and other targets in Lebanon --

Dressed in an olive-green uniform and wearing a holstered revolver, Arafat smiled broadly in describing as "dead and buried" plans by Israeli Foreign Minister Shimon Peres, the United States and unnamed Arab regimes to "cancel the PLO" as a full party to eventual peace talks and to step up an Israeli-Jordanian "condominium" in the West Bank and the Gaza Strip.

Such schemes, he said between sips of warm milk laced with honey, are now "definitively washed up" thanks to the "continuous waves of uprising" by Palestinans in the occupied territories for more than a year, climaxing with the major demonstrations there in December.

Despite his official neutrality in the discussions about forming a provisional government, Arafat's remarks repeatedly underlined his own personal support for the plan, which he said was shared by a "majority of Palestinians" from the occupied territories who had sent him messages.

Arafat said talks on the plan were expected to conclude by early February after PLO consultations with governments in the Arab world, Western Europe, the nonaligned movement and the Communist Bloc.

Under discussion for more than 15 years, the creation of a government-in-exile has been criticized both by radical groups within the PLO and by important segments of Arafat's mainstream Fatah organization.

They have argued that the PLO must either have "liberated" land of its own before making such a move, or must enjoy virtual state-within-a-state status, as it did in Lebanon before Israel invaded in 1982 and forced its headquarters out.

Without its own land, the PLO would be hard-pressed to operate freely in areas bordering Israeli-held territory without falling under the influence of governments such as Egypt, Jordan or Syria.

Arafat said that what he called the Palestinians' political maturity while fighting to end the Israeli occupation proved his long-held belief that "our people are better than the past, present or future leadership of the PLO."

Asked to outline arguments for and against creating such a provisional government, he said specifically that its formation would mean "facilitating {removal of} some obstacles" between the PLO and the United States. Arafat said a Kremlin envoy had reported that President Reagan informed Soviet leader Mikhail Gorbachev at the Washington summit meeting last month that the United States accepts "the principle" of a Middle East peace conference involving the five permanent U.N. Security Council members and regional powers, "although details remain to be worked out."

"If we have a provisional government, it will open some gaps in this dogmatic American administration policy," Arafat said.

He singled out for criticism recent congressional pressures that resulted in the closing of the PLO information office in Washington and threatened closure of the PLO observer mission to the United Nations in New York.

Those opposed to the provisional government, he said, argue that the United States will not be favorably impressed by such an initiative, which should be held in reserve for more propitious times.

If the principle of a provisional government is approved and eventually adopted by the majority of the Palestine National Council, Arafat said, he did not expect recurrence of the split that plagued the PLO after the 1982 war in Lebanon and only healed partially last spring.

"I think the period of splits is past," he said, arguing that Palestinians would not stand for them after the current demonstrations in the occupied territories and the three-year-old siege of the Palestinian refugee camps in Lebanon by Shiite Moslem militiamen.