MOSCOW, AUG. 2 -- The Soviet Union today suspended deliveries of all military equipment to Iraq, its closest ally in the Persian Gulf for the past two decades, and demanded an immediate withdrawal of Iraqi troops from Kuwait.

The Soviet embargo on arms deliveries to Iraq, which was announced by the official Tass news agency, completes the diplomatic isolation of the hard-line government of President Saddam Hussein. It also represents a significant turnaround in the traditional Soviet policy of competing for influence with Washington in the Middle East by automatically supporting radical Arab states.

The Soviet Union is the world's largest supplier of arms to Iraq. It maintained weapons deliveries throughout Iraq's eight-year war with Iran. Many of the Iraqi tanks, armored personnel carriers and helicopters sent into Kuwait during today's pre-dawn invasion were Soviet-built, while air cover was supplied by Soviet-made MiG fighters and Sukhoi interceptors.

Secretary of State James A. Baker III had called for a Soviet moratorium on arms supplies to Iraq during talks with Soviet Foreign Minister Eduard Shevardnadze in the Siberian city of Irkutsk. The news of the Iraqi invasion of Kuwait reached the two ministers just as they were sitting down to their final meeting in two days of informal negotiations on the shores of Lake Baikal.

{Early Friday, Baker announced in Ulan Bator, Mongolia, that he would meet again with Shevardnadze at the Moscow airport to issue a joint U.S.-Soviet statement condemning the attack on Kuwait. Baker had said previously that he would cut short by two days his visit to Mongolia and return to Washington to help plan the U.S. response to the invasion, Washington Post staff writer Al Kamen reported from Ulan Bator.}

Tass said the Iraqi ambassador to Moscow, Ghafil Jassim Hussein, was summoned to the Soviet Foreign Ministry to receive a government statement condemning Iraq's use of force against its neighbor. Hours later, the Foreign Ministry announced that the Soviet Union had decided to "suspend the delivery to Iraq of arms and military equipment in view of the circumstances arising from the invasion of Kuwait by the Iraqi armed forces."

Western analysts said the cutoff in Soviet weapons supplies would probably have little military significance in the short term but is an important political gesture. The Kremlin has been rethinking its policy toward the Middle East over the past few years, seeking to develop ties with the conservative Persian Gulf sheikdoms in addition to those it has with such radical states as Syria and Iraq.

Recently released Soviet statistics show that Iraq has a debt of more than $5 billion to the Soviet Union, most of it spent on Soviet arms. Soviet weapons shipments to Third World countries have recently been the subject of press criticism here on both moral and economic grounds.

The Soviet Union traditionally has had good ties with Kuwait, even at a time when neighboring gulf states such as Oman and the United Arab Emirates refused to have anything to do with the Communist regime in Moscow. The Soviets leased three oil tankers to Kuwait in 1987 after Kuwaiti vessels became targets of Iranian attacks during the Gulf war.

The crisis caught Soviet leaders out of Moscow, with President Mikhail Gorbachev on vacation in his native Caucasus and Shevardnadze in Siberia. At a news conference here this afternoon, Foreign Ministry spokesmen repeatedly refused to answer questions about measures the Soviet government might take against Iraq.

By condemning Iraq and suspending arms deliveries, Gorbachev has taken the moral high ground, consolidating his reputation as a statesman firmly opposed to the use of force in international affairs. At the same time, Soviet economic planners can welcome the prospect of sharply higher oil prices because of cuts in Kuwaiti oil production.

As the world's second largest oil exporter after Saudi Arabia, the Soviet Union stands to gain a windfall of at least $1 billion a year for every $1 increase in the price of a barrel of oil. Plummeting oil prices since Gorbachev came to power in 1985 have exacerbated the Soviet Union's financial problems, forcing the government to cut back on imports of consumer goods.

Figures released last week showed that the Soviet hard currency balance of payments deficit exceeded $11 billion in the first half of 1990, 2 1/2 times more than in the same period last year. Soviet banks and trading companies have been defaulting on payments to many Western partners.

Many foreign policy commentators here have been clearly outraged by Iraq's invasion of its tiny neighbor. Moscow Radio described the invasion as "unacceptable," and a leading Middle East expert, Igor Belyayev, accused Saddam of wanting to establish Iraq as the dominant Arab power in the region.

Today's Soviet government statement said the Iraqi invasion of Kuwait "totally contradicts the interests of Arab states, creates new additional obstacles to the settlement of conflicts in the Middle East and runs counter to the positive tendencies of improvement in international life."

Kamen added the following from Ulan Bator:

The idea of a joint U.S.-Soviet statement came in a previously scheduled meeting in Irkutsk between Dennis Ross, the State Department's director of policy planning, and his Soviet counterpart, Sergei Tarasenko.

At about 1 a.m. Friday local time, as Baker was finishing a dinner with Mongolian officials, the Soviet ambassador to Mongolia, V. U. Sitnykov, delivered a message to Baker from Shevardnadze, telling him of the strong Soviet statement condemning the invasion.

Baker then spoke to Ross and to Robert M. Kimmitt, under secretary of state for political affairs, in Washington, and with President Bush, who was on Air Force One en route to Aspen, Colo. Bush told Baker to meet with Shevardnadze at the Moscow airport and issue the joint statement.

The first senior U.S. official to visit Mongolia in nearly 50 years, Baker arrived just five days after the former Soviet satellite state completed its first multi-party elections in 69 years and spent the day meeting with the newly elected leadership. Communists running on a reform ticket won about 60 percent of the vote in an election that international observers said was fairly run.

Baker's Mongolian hosts treated him to a spectacular naddam -- a traditional festival at the base of the grassy foothills outside Ulan Bator. The festival began with traditional Mongolian wrestling and an archery show.

In meetings earlier in the day, Baker signed an agreement with Mongolian Foreign Minister Tserenpilyn Gombosuren to send 15 Peace Corps volunteers a year, beginning in the fall of 1991. Most of the volunteers will teach English. There are fewer than 20 English teachers now in Mongolia, whose 2 million people include fewer than 500 speakers of English.

U.S. officials, in an effort to show support for Mongolia's economic reform process and emerging democracy, also said they will sign a trade agreement as a first step toward granting the fledgling democracy most-favored-nation status so that Mongolia will benefit from lower tariffs.

The Persian Gulf crisis canceled Baker's plans to spend two days hunting and fishing in Mongolia. "Although it really breaks my heart to say this," Baker told his hosts at a government banquet, "I think I should return home. But maybe, just maybe, this will give me an excuse to return some time. At least I hope so."