BETHLEHEM, WEST BANK, AUG. 29 -- The elation with which Palestinians in the Israeli-occupied territories greeted Iraq's invasion of Kuwait appears to be increasingly tempered with anxiety over mounting economic costs here and the potentially tragic consequences of a war for the large Palestinian population in the Persian Gulf.

In the bustling market of this town, buyers and merchants alike still call Iraqi President Saddam Hussein a hero and rail against the presence of U.S. troops on Arab land. But in the municipal office overlooking Manger Square, Bethlehem Mayor Elias Freij has become the first prominent Palestinian leader in the West Bank to support the United Nations formula for an unconditional Iraqi withdrawal from Kuwait, saying it is the only way to head off a new disaster for Palestinians.

"Now we have to be realistic and the Iraqis have to be realistic, too," said Freij, a moderate who supports the Palestine Liberation Organization but has differed with its leadership in the past. "In order to avoid a catastrophic war, the Iraqi president should notify the secretary general of the United Nations that he accepts Resolution 660 and will withdraw completely from Kuwait."

Freij's stand differs sharply from that of PLO leader Yasser Arafat, who today proposed a "peace plan" under which Iraqi and U.S. forces in the region would be replaced by U.N. troops, sanctions against Iraq would be ended and the resolution of Baghdad's claims to Kuwait would be linked to the solution of the Israeli-Palestinian conflict and other regional problems. Although Arafat maintains that the PLO aspires to be a neutral mediator in the gulf crisis, many Western and Arab observers regard the PLO as an Iraqi ally seeking the most favorable outcome for Saddam.

Freij waved away a question on the PLO plan, adding: "I think there should be no plan. I think there should be simply an Iraqi acceptance of U.N. resolutions 660 and 661, two, three, four and five. The Kuwaiti government should return. Then, after a cooling-off period of six months or so, we can look for an Arab solution to the problems between Iraq and Kuwait."

Freij's appeal was dismissed by other Palestinian leaders in the West Bank, who said they supported the PLO stance. Still, the mayor's dissent appeared to reflect both growing tensions within the Palestinian leadership over its pro-Iraqi tilt and widespread anxiety over the potential cost of that position.

Although hotly disputing Freij, several Palestinian leaders said they shared his concerns that the Palestinian economy in the West Bank and Gaza Strip could be crippled by the ongoing crisis and that up to 1 million Palestinians in the gulf region could be uprooted by a war.

"I think we are the worst hit," said Saeb Erakat, a prominent Palestinian intellectual from Jericho and a supporter of the PLO position. "Every time something happens in the Middle East, the Palestinians are made to suffer the most for it. We have been suffering a heavy economic impact, and now the gulf state leaders are threatening to push us into conflict with them."

A few of the 350,000 Palestinians who lived in Kuwait are already trickling into the West Bank, and Palestinian leaders say they believe up to 20,000 could arrive in the coming weeks. Some of the refugees complain that they were driven out of the country by hostility from Kuwaitis, while others say they were merely seeking to avoid the conflict.

Freij said he feared that "if there is a war the Palestinians in the gulf will be expelled, because the gulf states see them as enemies. We will lose their incomes, and they will have no place to live."

"If Iraq withdraws and there is no war, everyone will stay where they are and eventually feelings in the gulf against the Palestinians will cool," he added.

Meanwhile, the economic fallout of the crisis has started to pose a serious threat to the Palestinian community here, already heavily burdened with the costs of the 2 1/2-year-long intifada, or uprising against Israeli rule. Many Palestinians have seen both their salaries and savings dip drastically in the past four weeks with a 30 percent plunge in local currency markets of the Jordanian dinar, in which most West Bank business is conducted.

At the same time, tens of thousands of Palestinians in the territories, as well as key institutions like schools and hospitals, have been squeezed by the abrupt cutoff of remittances from Kuwait. According to local economists and diplomats, about $120 million in payments from donors and workers flow annually from Kuwait into the West Bank, comprising 10 percent of its gross economic product.

Palestinian sources said the West Bank's largest hospital, Mokassed in East Jerusalem, has depended on $1 million a month in Kuwaiti donations for 80 percent of its operating expenses and may have difficulty now that the payments have stopped. West Bank universities, which Israel has pledged to reopen after a nearly three-year shutdown, are similarly dependent on $18 million in annual donations from Kuwait.

Freij said he will not have the money to pay for muncipal services or employees in Bethlehem after this month, because his own subsidies from Kuwait and other Arab states have been cut off. Moreover, he said, some 15,000 Bethlehem natives who lived in Kuwait have stopped sending money home to support their families, and some had turned up as indigent refugees in Jordan.

"This situation is disastrous for us," said Freij. "I want people in America to know my view that we want Iraq to withdraw and the Kuwaiti government to return. A lot of people feel this way, though not many are courageous enough to speak out as I do."

In the market near Freij's office, it was not possible in several hours of interviewing to find a passing Palestinian who supported the mayor's call for a withdrawal. Still, the Palestinians in the market seemed to have one thing in common with the veteran mayor: a fear of war. "What I believe is this," a bread merchant named Nabil said. "If there is a war, everyone will lose."