JERUSALEM, OCT. 5 -- Despite the mounting economic and political pressure on Iraq, Israeli military authorities continue to believe that the current standoff in the Persian Gulf favors Iraqi leader Saddam Hussein, who they say is well on his way to making the Iraqi takeover of Kuwait irreversible

According to the assessment of Israeli military intelligence, the United Nations economic boycott has brought about no visible worsening of Iraqi supplies or production in the last 10 days, the sources said. At the same time, Iraq has made significant progress in its campaign to obliterate Kuwait as a separate country, driving more than half the native Kuwaiti population out of the country and completing a series of projects linking the infrastructure of the two states.

The Israelis believe Saddam at present has no intention of withdrawing from Kuwait and that the senior Iraqi leadership is prepared to go to war with the United States and its military allies. However, military officials said the aggressive Iraqi activity in Kuwait may be setting the stage for a fallback offer by Saddam to withdraw and hold elections in the sheikdom, secure in the knowledge that his social engineering over the last few weeks will assure him a victory.

Israel's greatest concern in the crisis continues to be that some such diplomatic settlement will be arranged, leading to a withdrawal of U.S. forces from the Persian Gulf without any change in the power or ambitions of Saddam and his military machine. "From our point of view, this option is the most dangerous one," a senior military source said today in a meeting with several Western correspondents. "We could find ourselves alone facing Iraq."

Sensitive to charges that Israel is trying to push the United States into war, government officials here have been careful in recent weeks not to publicly repeat early warnings that Washington could not afford to wait out Iraq and should consider an early air strike. But the military officials made clear today that their own assessment of the crisis has not changed: Saddam, they maintain, stands to gain with the progress of time and has little to fear from the boycott.

"The sit-and-wait option plays into the hands of the Iraqis," said one of the military officials. "It gives them time to organize themselves and time to 'Iraqi-ize' Kuwait, and it could lead to an irreversible situation in Kuwait."

According to Israel's information, only about 40 percent of the 600,000 to 700,000 Kuwaiti citizens remain in the country, and more than half of the present population of the sheikdom is made up of Palestinians, Iraqis and other foreigners. Many of the foreigners in the country, the Israelis say, are sympathetic to Saddam and would be likely to support him if elections were held.

The military sources said the new Iraqi governor of Kuwait, Ali Hassan Majid, has managed to virtually extinguish the armed resistance inside the country in the little more than two weeks he has been there.

At the same time, the Israelis said, Iraq has launched an ambitious series of projects to link Kuwait more closely with Iraq. One major new road has been completed to join the one existing highway between Kuwait and Iraq, and other road links are under construction.

Iraq is also laying a railroad line between Iraq and Kuwait and has connected the water systems of the two countries, the military officials said. "There are a lot of projects underway and they are carrying them out very quickly," an official said.

Inside Iraq, according to the Israeli assessment, there has been no sign that consumer or industrial shortages have worsened since the U.N. blockade was extended to cover air flights Sept. 25. The officials said food from Iran has begun appearing in Iraqi stores but added that Israel did not think the contraband trade was backed by the Iranian government. "The Iraqis feel they can cope with the embargo for the coming months," one official said.

Despite a recent escalation of threats by Saddam to attack Israel, the military sources said there has been no significant change of Iraqi deployment at the two airfields in the west of the country where missiles are stationed within range of Tel Aviv.