OMAHA, JUNE 8 -- President Bush said today that he has not decided whether to break off the U.S. dialogue with the Palestine Liberation Organization (PLO), but he denounced as "sheer terror" the abortive May 30 Palestinian attack on Israel's coast and called on PLO leader Yasser Arafat to "speak out" and condemn it.

"Our dialogue and discussion is predicated in part on renunciation of terror," the president said, "In my view, this {beach attack} is sheer terror."

In an interview with reporters aboard Air Force One as he campaigned for Republican candidates in the Midwest, Bush said he and his aides are discussing whether to continue the talks begun with the PLO at the end of the Reagan administration. A senior official said a decision is expected by early next week.

Secretary of State James A. Baker III is scheduled for at least two congressional appearances at mid-week and expects to be questioned sharply on the U.S. response to the attempted beach attack, which was thwarted by Israeli military units. The administration also expects an increasing level of pressure next week because of the annual meeting in Washington of the American-Israel Public Affairs Committee, the powerful pro-Israel lobbying group.

Meanwhile, Baker, in remarks at a news conference in Turnberry, Scotland, at the close of the NATO foreign ministers' meeting, said the United States would respond to the attempted attack "in a way that reflects our dual commitment to promoting peace but to be resolute in countering terrorism," Washington Post staff writers Glenn Frankel and John M. Goshko reported.

Baker later added, "I do not intend to be seen suggesting that we would in any way countenance terrorism in order even to advance the noble cause of peace because terrorism . . . is a very, very serious matter with us.

"Too many Americans have been victimized by this. It is something that we condemn in the strongest terms."

Baker's remarks seemed to put Washington on a collision course with the PLO, whose 15-member executive committee meeting in Baghdad Thursday failed to take any action against Abul Abbas, the factional leader whose group asserted responsibility for last week's assault. Instead the committee issued a statement excoriating the United States for "protecting Israel and its crimes" and for "encouraging it to commit more."

A senior official traveling with Bush also said the president and his top advisers were not satisfied with Arafat's response to the beach attack.

The administration is under mounting pressure in Congress to cut off the dialogue with the PLO, which was begun in December 1988 after Arafat publicly renounced terrorism and recognized Israel's right to exist. At that time, then-Secretary of State George P. Shultz directed the senior U.S. participant in the talks, ambassador to Tunisia Robert Pelletreau, to warn the PLO that future acts of terrorism would cause the United States to end the talks if the organization did not denounce those acts and discipline members who organized or participated in them.

Baker said today that those conditions still applied. He also said he believes the peace process would continue even if the dialogue were suspended. The United States would "continue to remain engaged as long as the parties themselves want us to and will remain engaged themselves," he said.

British Foreign Secretary Douglas Hurd, speaking to reporters after Baker's remarks, urged the United States to maintain its contacts with the PLO. "I think a break in the dialogue would be a real setback" in the peace process, said Hurd.

In his remarks to reporters, Bush said he had spoken to Egyptian President Hosni Mubarak from Air Force One on a "wide array" of Middle East subjects, particularly the prospects of getting peace talks started. While saying the formation of a government in Israel is "an internal matter" for that country, the president seemed pessimistic about prospects for peace negotiations if a new government is headed by acting Prime Minister Yitzhak Shamir of the right-wing Likud bloc. Asked if a Shamir government would make the peace process harder, he replied, "I'm not going to say that. Maybe it will go forward."

In discussing the May 30 attack, Bush did not lay responsibility on the PLO or its factions, asserting that "We're trying to learn a little more." But he condemned the attack and the cycle of violence in the Middle East. "This was horrendous," he said, "There was no rationale for it other than, in my view, sheer terror. That is clearly something that is unacceptable to us."

The president also lamented that "every time we get something started {in the Middle East}, why there seems to be some outbreak."