JERUSALEM, AUG. 4 -- Iraq's invasion of Kuwait has created a new complex of problems for the Palestinian leadership, which sees Iraqi President Saddam Hussein as a potential champion against Israel but fears that his drive for power could suffocate the popular uprising in the occupied territories.

In the streets and markets of the West Bank and Gaza Strip, Saddam's crushing blow against Kuwait has been viewed with sympathy by a population that has begun to perceive the Iraqi leader as its strongest ally in an increasingly desperate battle against Israel. "Glory to Saddam," read graffiti scrawled on walls in Nablus, the largest city in the West Bank.

In Cairo, the Palestine Liberation Organization, which in recent months has drifted into alliance with Iraq, voted against an Arab League resolution calling for an Iraqi withdrawal from Kuwait. PLO Chairman Yasser Arafat, currently at odds with both the United States and the moderate Arab leadership of Egypt, met Friday with Libyan leader Moammar Gadhafi on the issue and announced that he had a plan for resolving the conflict.

The initial Palestinian response is the logical outcome of what has been a shift toward hard-line positions by the movement over the last several months, driven by frustration with the failure of efforts by Egypt and the United States to draw Israel into a peace process.

Palestinian militants, increasingly ascendant both inside and outside the territories, see alignment with a powerful Iraq that can threaten Israel as an alternative to a diplomacy centered on Washington and Cairo. Still, many Palestinians here fear that Saddam's campaign may deliver a potentially crushing blow to the 32-month-old uprising in the occupied territories and the dynamic grass-roots movement it has bred.

In the short term, these activists say, Iraq's offensive seems sure to deprive the intifada, as the uprising is called in Arabic, of the vital fuel of international attention and lessen the pressure on Israel to end the occupation.

In addition, Saddam's appeal as a pan-Arab strongman seems likely to weaken the sense of self-reliance and sovereignty that has developed during the intifada among Palestinians in the territories.

For many Palestinians, the rebellion has been a way of taking hold of their own cause after years of passivity and forcing both the United States and Israel to address them as a community. But, some Palestinians fear, as Saddam renews a broader Arab-Israeli conflict, the nearly exhausted population here could lapse into the mind-set in which it waited for many years for outside powers to resolve its conflict with Israel.

"A lot of people who have the sense that the intifada failed could now turn to Saddam as the new savior," said one prominent activist. "That would be a very dangerous illusion, because it would undermine the sense of autonomy the intifada has built up."

Such a shift of battlefields, noted Palestinian journalist Daoud Kuttab, is what the new right-wing Israeli government is hoping for. "They are trying to turn the focus from the Israeli-Palestinian conflict to an Israeli-Arab conflict," he said. "So these events may play into their hands."

Prime Minister Yitzhak Shamir feels confident that once the Palestinian problem is subsumed into a larger regional conflict, as it was for 40 years before the intifada began, Israel can only emerge as a winner, both in terms of its international image and in its ability to avoid any change in its hold on the territories.

Though concerned by Saddam's drive for military supremacy in the region, Israeli officials have not concealed their elation over the prospect that, as government spokesman Yossi Olmert said, Israeli-Palestinian issues "will from now on be put in their proper, realistic context . . . the growing danger posed by Iraq." The most immediate effect of such a shift could be an end to a year of mounting U.S. pressure on Israel to open negotiations with a Palestinian delegation on a proposal for elections in the occupied areas. Palestinian leaders say they had already lost faith in that formula, which demanded far-reaching concessions from the PLO. Nevertheless, the de-emphasis of the talks, a development now openly anticipated by Israel, could leave the Palestinian leadership without a clear alternative to patronage by Iraq.

At the same time, the risk that Saddam's adventurism will siphon energy and attention from the intifada is particularly great for the Palestinians because it comes at a moment when both the uprising and its local leadership are in disarray. Exhausted by 32 months of conflict and lulled by the recent withdrawal of Israeli troops from some areas, many Palestinians have ceased active participation in protests.

Fatalities in clashes with the army -- a driving force of the uprising -- have fallen off steeply. Palestinians claimed only three such "martyrs" in the West Bank in July and none has died in the Gaza Strip since May. At the same time, violence among Palestinians has risen sharply, defying all efforts of the leadership to control it. In July, 15 Arabs were slain by Palestinian militants for alleged collaboration with Israel or moral offenses, raising to more than 230 the number of Palestinians killed in intracommunal violence in the last 32 months. Some 700 have been killed by Israelis.

The uprising's local leadership, never strong, has been racked by factional disputes and has lost much of its credibility with both grass-roots militants and the local population. A book called "Woe to the Princes," which accuses the intifada's spokesmen of corruption and incompetence, has been a big seller this summer in East Jerusalem. Late last month, many Palestinian leaders were shocked when young activists, ignoring explicit orders to the contrary, organized massive cheating by students on high-school final exams.

Some Palestinians fear that the tenuous structure of Palestinian leadership in the territories will break down, opening the way to more anarchic violence among rival factions and increasing the movement's psychological and material dependence on outside forces, ranging from the PLO and Iraq to the radical Palestinian terrorist groups Saddam has supported.

To head off such a development, local leaders are trying to agree on steps to institutionalize the intifada, shifting its emphasis from demonstrations to mass organization. Among the ideas being debated, so far inconclusively, are the possible declaration of a provisional government or the autonomous staging of elections for a formal leadership.

"People believe we're at a crossroads," said Kuttab. "If the local leadership and the PLO do not take matters in hand now, things are going to get much worse."