JERUSALEM, AUG. 5 -- Israel's government, seeing itself as a major winner in the Middle East's latest crisis, is approaching its first talks with the Bush administration this week confident that recent strains in U.S.-Israeli relations will pale beside the threat posed by Iraqi President Saddam Hussein.

David Levy, the foreign minister in the new government formed by Prime Minister Yitzhak Shamir in June, is due to meet with Secretary of State James A. Baker III on Thursday for discussions that had been expected to focus on U.S. proposals for Israeli-Palestinian negotiations.

While aides say Levy still hopes to advance Israel's approach to the peace process, which has been at the center of tensions between Washington and Israel during the last six months, other Israeli officials say Iraq's invasion of Kuwait has fundamentally shifted the diplomatic balance, pushing the Israeli-Palestinian conflict to the sidelines.

"We are the big winners of the whole situation," said a senior government official today. "It's like a God-given gift for us. It changes the perception of almost everything, above all the priorities the U.S.-Israeli relationship."

The continuing crisis in the Persian Gulf makes it unlikely that Israel will be forced to make crucial decisions in the near future about talks with the Palestinians, which are strongly resisted by ultra-nationalist parties in the new right-wing coalition, officials say. Moreover, Shamir's government, seeing itself vindicated in its insistence in recent months on the threat posed by Iraq, can now aspire to play a renewed role as a strategic ally of the United States, helping to deter further Iraqi expansion.

One senior figure in the government, Finance Minister Yitzhak Modai, today urged Levy to demand stepped-up arms deliveries and new military cooperation agreements from the United States in the wake of the crisis. While playing down that suggestion, senior officials said they expected that incipient moves in Washington to cut back financial aid to Israel and downgrade joint military projects would be reversed.

Israeli officials say that Saddam's aggression underlines the seriousness of his threat to Israel, which he has threatened to "burn" with chemical weapons in response to any attack. But they note with elation that while U.S. and other Western leaders discounted Iraqi saber-rattling until last week, now most of the world's major powers are enlisted in a campaign of sanctions against Israel's enemy.

As an added benefit for Israel, the Iraqi move has created a new predicament for Palestine Liberation Organization leader Yasser Arafat, a Saddam ally who seemingly has been pushed farther away from any rapprochement with the United States or its ally Egypt by the crisis. As long as the PLO is aligned with Baghdad, officials here point out, it will be relatively easy for Israel to resist any significant concessions to the Palestinians.

"We are benefiting from every perspective," said Yossi Olmert, the director of the government press office. "Of course, we can lose big if Saddam decides to attack us next. But at least the rest of the world now sees what we have been saying all along."

Since its formation, one of the major priorities of Shamir's new government has been to avoid any further deterioration in relations with Washington, which in recent months have reached their lowest point in years. In testimony before Congress days after the new government was formed, Baker excoriated Shamir for refusing to go along with a formula for Israeli-Palestinian negotiations intended to implement Israel's own plan to hold elections in the occupied territories.

Most Israelis believe that the new government, which has only a slim majority in the parliament, would never agree to Baker's formula, which Washington has relentlessly continued to press on Israel. Nevertheless, Levy, a flexible and ambitious politician who hopes to use the Foreign Ministry as a springboard to succeed Shamir, had been hinting in recent days at possible compromises by Israel, clearly hoping to avoid a confrontation on his first visit to Washington as foreign minister.

In testimony before Parliament last week, Levy said that Israel would be willing to "take risks" if it received written guarantees from the United States on three points: that the United States would not seek talks between Israel and the PLO, that the United States would not support the creation of a Palestinian state and that the Israeli-Palestinian talks would be limited to the topic of Shamir's election plan.

In private, some officials hinted that Israel, in turn, might meet a key U.S. demand by agreeing to participation in the negotiations by Palestinians who were expelled from the territories. Today, however, several officials said that they no longer expected that Levy would be forced into detailed negotiations with Baker on the Palestinian issue.

"The main focus will have to be the Iraqi threat," said one official, who asked not to be named.

While generally agreeing with that assessment, several commentators outside the government said Israel's respite from U.S. pressure might well turn out to be short-lived. Once the present crisis subsides, journalist Akiva Eldar of the newspaper Haaretz pointed out, the Bush administration would be left with the priority of bolstering Egypt as a moderate counter to Iraq in the Arab world -- a task that would require progress on the Israeli-Palestinian peace process, for which Egypt has been the prime Arab broker.