CAIRO, JULY 25 -- Iraq and Kuwait are to begin direct talks in Saudi Arabia this weekend in an attempt to settle their differences over boundaries and oil policies, Egyptian President Hosni Mubarak said here tonight.

Mubarak, who spent Tuesday shuttling among Arab states in an effort to defuse the latest Persian Gulf crisis, also said Iraqi President Saddam Hussein had agreed to stop hostile press attacks against Kuwait "from tomorrow" and had told Mubarak he had "no intention" of invading Iraq's much smaller southern neighbor.

"It doesn't need any arbitration," Mubarak said of the Iraqi-Kuwaiti dispute, which erupted a week ago with a barrage of verbal assaults from Baghdad on the gulf emirate. "The two parties are going to sit with each other" to discuss their problems, beginning Saturday or Sunday in Jeddah, he said.

{Iraqi troops will begin pulling back from the border with Kuwait at dawn Thursday, the Associated Press quoted unnamed diplomatic sources based in the Persian Gulf as saying.}

Mubarak's mediation trip, which took him to Iraq, Kuwait and Saudi Arabia, was aimed at lowering tension in the area, which had reached its highest level since the end of the Iran-Iraq war in 1988. Iraq has accused Kuwait of stealing its oil and moving to cut world oil prices by overproducing.

The Egyptian leader tonight warned the United States not to inflame the situation. Asked by reporters about this week's "short-term exercise" in the Persian Gulf by the U.S. Joint Task Force Middle East, Mubarak replied: "I call on the United States that we do not escalate this issue between two brotherly Arab states."

Mubarak also urged Kuwait and Iraq to show "flexibility" in their coming discussions "so that we do not force an outside power to enter with us and play in the middle of us and then cause problems that we will not know the end of."

He contradicted Western reports that Iraq had moved troops to its border with Kuwait, saying that Saddam Hussein "didn't put new troops on the borders. What's present there, was present before."

"And I could tell you, confirm, that there is no intention from President Saddam Hussein to move any troops toward Kuwait," Mubarak said, adding that he was told this directly by the Iraqi leader. The two men met alone for two hours, an Egyptian official said.

Direct discussions between Kuwait and Iraq on their longstanding border disputes would appear to be a concession for Kuwait, which had proposed that they be submitted to Arab League arbitration. Kuwait apparently feels that Iraq will impose its territorial claims on parts of Kuwaiti territory in direct talks without a mediator, Western diplomats there said.

Kuwait's prime minister, Crown Prince Saad Abdullah Sabah, today said his country "still wants in all sincerity and enthusiasm to meet our brothers in Iraq to reach an understanding." He added that he was "optimistic . . . that good ties between Kuwait and Iraq will return, and we will consider what happened a cloud which will soon go."

However, he warned, "the sons of Kuwait . . . will never under any condition give in to threats, extortion or blackmail."

Mubarak said the two Arab states would need "several meetings" to iron out their differences. A senior Egyptian source said the delegations would most likely be headed by the countries' foreign ministers.

Mubarak's last stop on his day-long tour was Saudi Arabia, where he briefed King Fahd on his talks with Saddam Hussein and Kuwait's leaders, officials said.

While Saudi Arabia's ties with Kuwait are not especially close and the Saudis also have accused Kuwait of oil-quota busting, the conservative monarchy is apprehensive about Saddam Hussein's apparent intention to impose his will on gulf regional politics and on the pricing policies of the Organization of Petroleum Exporting Countries.

The Saudis "can see the smoke signals" from Iraq, and "they are worried. The whole gulf is worried," said an Egyptian official who accompanied Mubarak on his trip.

The Jeddah talks are likely to move quickly over Iraq's financial demands but become bogged down on border issues because Kuwait is extremely leery of making territorial concessions to its larger neighbor, diplomats said.

"Kuwaitis are more willing to give up money than they are to give up land," said one Western diplomat based there.

The toughest border issue will probably not be the Rumaila oil field, from which Iraq has accused Kuwait of "stealing" oil, but rather Kuwait's Bubiyan and Warba islands. Largely uninhabited, they shield Iraq's principal outlet to sea at Umm Qasr, and Baghdad has long pressured Kuwait to hand them over or lease them. Kuwait has refused, fearing it would never get them back, Western diplomats there said.

After the Iran-Iraq war ended with a U.N.-sponsored cease-fire in August 1988, Iraq signed nonaggression pacts with Saudi Arabia and Bahrain, but refused to do so with Kuwait. This raised Kuwaiti fears of Iraq's expansionist designs on its territory.

Those concerns were heightened last year when Kuwait's ruling emir, Sheik Jabir Ahmed Sabah, went to Baghdad to settle the border problems but came away empty-handed. Saddam Hussein had flatly refused to discuss the issue, according to Kuwaitis and Western diplomats based there.

"What Saddam wants, frankly, is a solution where he takes some territory" from Kuwait, a European diplomat said.

Military analysts and Western diplomats have said they doubt Iraq will invade Kuwait in the short-term. But they do not rule out the possibility of a limited military move to grab some Kuwaiti territory or oil field near the border to keep up pressure on the emirate, they said today.