HOUSTON, JULY 10 -- Leaders of the Western industrial democracies engaged in a fresh round of arguments over aid to China today and struggled over the language of their response to Soviet President Mikhail Gorbachev's appeal for long-term economic assistance.

Tonight, the leaders settled on the tone of a letter of encouragement for Gorbachev's perestroika reform program, promising to expedite international studies of the Soviet economy as a precursor to possible aid from the West. The evaluation by a team of Western experts will be completed by year's end.

The leaders agreed to let Japan restart a $5.6 billion loan program to Beijing and said they would consider resumption of some additional World Bank lending. But they decided to keep in place the sanctions that were imposed last year after the Tiananmen Square massacre, and they urged the Chinese leadership to move toward "political and economic reform, particularly in the field of human rights."

In a dinner discussion Monday evening and in meetings today, Japanese Prime Minister Toshiki Kaifu argued that it was important not to isolate China and pressed the other leaders to lift some economic sanctions, officials reported. But French President Francois Mitterrand and Canadian Prime Minister Brian Mulroney resisted, saying that China had not sufficiently eased its repressive policies since last year's crackdown on pro-democracy demonstrators. President Bush and other leaders took middle positions in the debate, officials said.

The leaders' key aides met until well past midnight Monday trying to bridge the disagreement. After another meeting of the leaders this morning, they issued a political communique that adopted both points of view. "It wasn't easy to resolve," said one participant. The statement acknowledged some signs of improvement in China but said "the prospects for closer cooperation" with the West would be "enhanced" by more progress on reform. While keeping sanctions intact for now, the leaders said they would lift some of them if there are "further positive developments" in Beijing.

China has been actively seeking to lift the sanctions and resume receiving World Bank loans, which were suspended after the crackdown. In addition to existing lending for humanitarian purposes such as earthquake protection, the leaders agreed to "explore" the possibility of providing other World Bank loans, such as for environmental protection. Some officials said that the expansion of World Bank lending would be only a modest share of credit suspended last year.

The summit political communique did not even mention Japan's desire to resume its loan program, which had been suspended since Tiananmen Square, but officials said the omission was a green light to go ahead. "It would not surprise me if they went forward," said Secretary of State James A. Baker III.

In their private discussions, the leaders grappled, sometimes contentiously, with the changes roiling the communist world, and what kind of response should be forthcoming from the West. Much of the discussion centered on the tone of the letter to Gorbachev and who would conduct the study of the Soviet economy. Canadian Foreign Minister Joe Clark reported that Mulroney argued that "the essential point was to take into account the position of Mikhail Gorbachev . . . who was watching closely this meeting . . . seeking not only the substance of our response" but also wanting a unified Western answer.

"We have been looking for a quick, upbeat, united way to respond to an important request from the president of the Soviet Union," Clark said. "Gorbachev demanded a profound economic dialogue" with the West, "and it was that demand to which we were responding."

The leaders also tonight signed off on how the West will study the Soviet economy, which had been a matter of dispute. A lead role will be performed by the International Monetary Fund, which will work with the World Bank, the Organization for Economic Cooperation and Development -- a Paris-based research group -- and the European Bank for Reconstruction and Development, which is being set up to aid the emerging democracies of Europe.

The new evaluation would be carried out in "close consultation" with one already in progress by the European Community, officials said. While it remained unclear whether the two studies would overlap, officials said it was certain they would be complete by year's end. The EC report is due Oct. 27; officials said it may be combined with the new effort.

Beyond the study, much of the discussion among the leaders was about Gorbachev's prospects and with what sense of urgency the West should approach his economic crisis. The United States has insisted that technical aid and expertise is what the Soviet economy requires, not direct aid. But officials said West German Chancellor Helmut Kohl and Mitterrand argued that Gorbachev's troubles require some kind of immediate response on grounds that it was an opportunity that could slip away. "The Germans don't want to take the chance" of failing to help Gorbachev, and then seeing him run into deeper trouble or perhaps be ousted, a senior U.S. official said.

Baker told reporters that the leaders were wrestling with the "scope and degree and extent of assistance" to the Soviet Union, and he said the U.S. opposition to direct aid would not necessarily be permanent.

The final communique will be released Wednesday.

In their political declaration today, the leaders also vowed "to help in practical ways those countries that choose freedom." They saluted movement toward democracy in Latin America, Africa and Asia, and urged Cuba to "join the democratic trend."

The leaders also issued a detailed statement calling on nations to help stop the proliferation of nuclear, chemical and biological weapons. In another declaration, the leaders promised a continued fight against terrorism, particularly air sabotage. They also called for release of all hostages being held in the Middle East and urged "those with influence over hostage-takers" to use it to seek the release of captives.

Baker said the leaders discussed the Middle East and "agreed on the need for movement in the peace process." He said they also reviewed the recent conflict between India and Pakistan over Kashmir and vowed to "use all means at our disposal" to encourage the recent moves toward a dialogue between the two nations.