MOSCOW, OCT. 14 -- A Soviet news agency reported today that Iraqi President Saddam Hussein has hinted he might be prepared to withdraw his troops from most of Kuwait in exchange for keeping several strategic islands in the Persian Gulf. But Western and Arab diplomats here said they doubted there has been any fundamental change in Iraq's position.

The Novosti news agency said Saddam softened his position on the annexation of Kuwait during talks last week with a senior Soviet envoy, Evgeny Primakov.

"It followed from {Saddam's statements} that Iraq could withdraw its troops from Kuwait, keeping for itself southern Rumaila and the islands of Warba and Bubiyan, which open the way" to the gulf, said the Novosti report. The Rumaila oilfield is on the Iraq-Kuwait border, and each nation accused the other of stealing oil from the region before Iraq's Aug. 2 invasion.

{In Baghdad, the Iraqi government Sunday denied that it might withdraw from parts of Kuwait. "Those disseminating such baseless reports are well known and so are their aims. Kuwait was and will continue to be Iraqi land forever," the official Iraqi News Agency said.

{In Tunis, Yasser Arafat, chairman of the Palestine Liberation Organization, said Saddam was showing a "certain flexibility" regarding his stance on pulling out of Kuwait and urged all countries involved in the gulf crisis to follow suit, the Associated Press reported. He did not elaborate.}

Novosti also said Primakov warned the Iraqi leader that the Soviet Union would do nothing to prevent U.S. military action against Iraq should Washington decide to launch an attack.

The Soviet news agency did not identify the source of its information. Following the general relaxation of Soviet controls over the mass media, it is difficult to be sure to what extent news agencies such as Novosti reflect the official Kremlin point of view. Once regarded as the semi-official voice of the Soviet government, Novosti is attempting to compete with a host of independent news agencies that have sprung up here over the last year.

In an interview last week, Soviet Foreign Ministry spokesman Gennadi Gerasimov discounted reports of a significant softening in the Iraqi position, saying they appeared to be based on "nuances" and "hair-splitting."

Soviet officials have told foreign diplomats here that, in conversations with Primakov, Iraqi Foreign Minister Tariq Aziz dropped the customary strong language about Iraq's historical claims to Kuwait. The change in Iraqi tone led members of Primakov's delegation, upon their return to Moscow, to express a guarded optimism about the prospects for a political settlement to the crisis.

Several Western and Arab diplomats said, however, they were skeptical that there had been a substantive change in the Iraqi position. They said the Kremlin had an interest in creating an impression of movement on the diplomatic front to win time for a political solution.

"The Soviets know that their strategic position in the Middle East will be determined by the outcome of this crisis," said one diplomat. "They know that their position is likely to be weakened if the United States defeats Iraq militarily. The best outcome for them would be a peaceful Iraqi withdrawal. Failing that, they would like to make sure that any American military action takes place under the cover of the United Nations."

In a commentary in this week's Moscow News, military analyst Alexei Arbatov said the Soviet Union should consider sending its own servicemen to the gulf on a voluntary basis. He said Soviet participation in the multinational force in the region would help ease the concern of senior military officers about the U.S. military buildup close to the Soviet Union's southern borders.

A veteran Soviet commentator on the Middle East, Igor Belyayev, said the feeling in Moscow was that the next few weeks could be crucial in determining the outcome of the conflict. He noted that the rainy season begins in the gulf at the end of November, making military intervention much more difficult.

Belyayev and other Soviet analysts said the military situation in the gulf is likely to be a major subject in talks here this week between Defense Secretary Richard B. Cheney and Soviet leaders.

The initial optimism displayed by Soviet officials over Primakov's visit to Baghdad appears to have been largely swept away by a tough Iraqi statement Friday warning the Kremlin not to provide secret information to Cheney. The Iraqi news agency INA said Baghdad might retaliate by refusing permission to Soviet technical experts to leave Iraq.

Novosti reported that Primakov succeeded "with great difficulty" in convincing Saddam to allow 1,500 out of the 5,000 Soviet citizens remaining in Iraq to leave the country. But even that concession appears to be in some doubt following the latest Iraqi blast against Moscow, Soviet analysts said.

Novosti also reported that Soviet military intelligence had prior information about the likelihood of an Iraqi invasion of Kuwait with the help of satellite photos, intercepted communications and "traditional methods." But according to Novosti's information, which dovetails with other accounts in the Soviet press, the Defense Ministry failed to transmit its information to the political leadership.