BAGHDAD, IRAQ -- The Palestine Liberation Organization, frustrated at the breakdown of a U.S.-Egyptian initiative to set up direct Palestinian-Israeli talks, has shifted its primary diplomatic focus in the Arab world from Egypt to Iraq.

By identifying more closely with Iraq and its confrontational leader, President Saddam Hussein, the PLO hopes that "maybe the Americans will try to understand us better. Maybe they will try to understand we are not ready to surrender," said Abdullah Hourani, a member of the PLO's executive committee and a confidant of Chairman Yasser Arafat.

The move reflects a convergence of Baghdad's and the PLO's interests. Saddam Hussein is promoting a tough, combative Arab stand against U.S. policies, particularly support for Israel, as he aims to become the preeminent Arab spokesman. He apparently hopes to give impetus to this leadership bid by acting as a vocal patron of the PLO.

The PLO, meanwhile, complains that it has nothing to show for months of close coordination with U.S. ally Egypt, which was aimed at implementing Secretary of State James A. Baker III's proposals for direct talks between Palestinian and Israeli officials in Cairo.

The PLO decision to give more attention to relations with Baghdad also indicates what many observers see as Iraq's blossoming regional influence. "From our point of view," Hourani said, "the main development in the balance of power in the region is the growing Iraqi power, militarily, politically and economically . . . . Iraq is creating the material base for a balanced settlement in the region . . . which is not accepted by the Israelis or the Americans."

PLO-Iraqi cooperation was clear at the Arab League summit meeting held here last week as the two worked closely to stake out militant positions critical of U.S. Middle East policies during the debates.

A moderate Arab bloc led by Egyptian President Hosni Mubarak, who publicly differed with Saddam Hussein in their speeches, succeeded in toning down the language of the final communique. But the document was a far sharper denunciation of U.S. policies than those issued after past Arab summits.

Hourani said, however, that the PLO is still ready to deal with Baker's proposals, which were rejected by Israel in March, if they are reactivated.

"The PLO is, up to now, honest to any word" that it asked the Egyptians to relay to the Americans, Hourani said in an interview last week. He was referring to Egypt's role as an intermediary between the PLO and Washington in the negotiations seeking to implement Baker's proposals.

Egypt assumed that role after Mubarak, hoping to energize a peace process, drew up a 10-point proposal for implementing Israeli Prime Minister Yitzhak Shamir's plan for elections in the Israeli-occupied West Bank and Gaza Strip. Mubarak's initiative was taken up by the United States and modified into the Baker proposals.

During these negotiations, the United States communicated with the PLO principally through the Egyptian government. This nettled Palestinian leaders who would have preferred to discuss the Baker plan in the direct U.S.-PLO contacts that began in Tunis early last year.

Those contacts, now known as the U.S.-PLO dialogue, were begun after Arafat, in December 1988, recognized Israel and renounced terrorism. Then-president Ronald Reagan authorized a dialogue with the PLO through the U.S. ambassador to Tunisia, Robert Pelletreau.

PLO officials have said they believe Egypt's ability to exert diplomatic pressure on the PLO's behalf is hampered by Cairo's economic dependence on the United States and its peace treaty with Israel. Some complained that Egypt, in an effort to please Washington, was pressuring the Palestinians to make too many concessions.

PLO-Egyptian relations soured further when the PLO failed to strongly condemn the terrorist attack on a busload of Israeli tourists near Cairo in February. In the aftermath, Egyptian newspaper columnists, some close to Mubarak, harshly criticized the PLO for this.

Hourani placed closer PLO-Iraqi cooperation in the context of the PLO's decision to pursue what he called alternate channels to get across its case.

"The channel which we were working with Egypt and through Egypt, which is the American channel, did not give any result, or at least did not give so much result," he said. "The Egyptians tried from their side. But because of the Israeli attitude and from our point of view, because of the American attitude which did not put enough pressure on Israel, the peace march . . . didn't achieve any progress."

"So now, we are trying to activize the other channels," Hourani said, indicating that the PLO hopes to get Europe and the Soviets to play a more active role.

In Saddam Hussein, the PLO sees a partner willing to strike a bellicose posture toward Israel and Washington. Relations between the PLO and Iraq have not always been rosy. Twenty years ago, when troops of Jordan's King Hussein clashed with PLO forces, eventually expelling them from Jordan, Iraqi troops stationed there did nothing to help the PLO.

The PLO does not intend to drop its relationship with Egypt or "to exclude America," Hourani said. "But we don't want only to depend on this channel." On this score, he said, "we find very good understanding from Iraq."

Special correspondent Lamis Andoni in Amman contributed to this report.