BAGHDAD, IRAQ, JAN. 1 -- Despite renewed hopes that the United States and Iraq may soon agree on a formula for dialogue, Iraqi President Saddam Hussein donned his military fatigues, strapped on his pistol and spent New Year's Eve with his troops in occupied Kuwait, where he reiterated his determination to hold on to the captured Persian Gulf sheikdom.

"Let them mass whatever number they can, because God will protect us from evil and save Iraq," the official Iraqi News Agency quoted Saddam as telling his commanders.

The defiant Iraqi stand was expressed also by the state-run Baghdad Observer, which said in an editorial: "To {President} Bush's disappointment, the unprecedented U.S.-dominated buildup has failed to force Iraq to blink. At a time when the U.S. awaits impatiently for a sign indicating Iraqi readiness to compromise, Iraq is growing more and more resolved not to cede any of its rights."

Saddam's continuing refusal to give in to pressure from the international coalition arrayed against him may reflect what analysts believe is a key advantage he holds in the diplomatic maneuvering now underway: If peace talks fail and war breaks out, Iraq appears quite willing to lay waste to Kuwait to deprive the U.S.-led alliance of a swift and relatively cheap victory.

These analysts, who include Americans, Arabs and a senior Iraqi official, say that Saddam's attitude now seems to be: If the Iraqis can't have Kuwait, nobody else can. And Western observers here say Saddam has the capability not only to inflict great pain on U.S.-led forces attempting to wrest Kuwait from him, but also to level the oil-rich emirate.

A senior Iraqi official warned Monday that if war breaks out "it will be a long-term war," and as for the possible consequences to Kuwait: "We understand that war is devastating; we expect big damage."

Diplomats here concur in that assessment, with one declaring that while it is "very difficult to read Saddam's thinking," the behavior of his forces in Kuwait thus far suggests a complete disregard for its continued existence. Saddam permitted Iraqi troops to loot Kuwait City, remove computers, hospital equipment, automobiles, traffic signals, foodstuffs, household furnishings and anything else they could lay their hands on, the diplomat said. "He got everything he wanted from Kuwait. If he planned to develop it, he wouldn't have pillaged it the way he did."

Another diplomat noted that "the premise of the Kuwait attack was vindictive, not strategic" in that Saddam was seeking to punish Kuwaiti leaders for allegedly refusing to negotiate a border dispute or to write off a multi-billion-dollar debt Iraq incurred with Kuwait during the eight-year Iran-Iraq war.

"I'm sure he's going to take as much down as he can," said retired admiral Marmaduke Bayne, commander of U.S. forces in the Middle East from 1969 to 1972 and later chairman of the Center for Contemporary Arab Studies at Georgetown University. Bayne said that all the diplomatic maneuvering since the Aug. 2 invasion of Kuwait and the subsequent disputes over a suitable international response have given Saddam valuable extra time to fortify Kuwait, send in extra supplies and prepare his troops psychologically for battle.

Another Middle East specialist, Rashid Khalidi of the University of Chicago, said U.S. military leaders have made such a great effort to persuade their troops and the American public that conflict over Kuwait will not lead to another Vietnam debacle that they have failed to consider another possibility -- that Kuwait could turn into another Beirut.

"I'm sure the Iraqis have paid some attention to the Palestinian-Israeli war" in Beirut, said Khalidi, author of the book "Under Siege," which chronicles military strategies used by the Palestine Liberation Organization during the 1982 Israeli invasion of Lebanon.

Khalidi noted that the Israelis were able to move swiftly during the early days of their offensive but bogged down when they reached Beirut, where the Palestinians had the advantage of fighting back from buildings and reinforced-concrete rubble that served as ready-made defensive bunkers. "You can assume Iraqis will prepare for {urban warfare}," he said.

Khalidi said also that U.S. planners may have assumed wrongly that air superiority would enable them to overwhelm Iraqi defenses. Saddam's forces would take a heavy beating, he said, but at the cost of Kuwait's destruction. "Kuwait will be devastated if there is ground fighting. . . . A lot depends on how well dug-in the Iraqis are. It won't be easy, even if you bomb them to hell with B-52s."

A Western diplomat here and other analysts suggested that if war does come, the U.S. strategy might be to avoid any kind of attack on Kuwait City and lay siege to it instead in hopes of starving Iraqi forces out.

"The objective of the United States should be to ensure that the garrison in Kuwait City itself is totally isolated from the rest of the Iraqi command structure . . . so that the garrison's choice may be one of surrender rather than urban conflict," said Gregory Copley, editor-in-chief of Defense and Foreign Affairs magazine.

Urban warfare, Copley argued, "is the one prospect that offers the greatest chance of casualties. "U.S. strategy for taking Kuwait City has "really got to be about interdiction of supplies." Copley said he believes "there's no question that if Saddam thought he was going to lose the confrontation, he would definitely sacrifice not only Kuwait, but Baghdad itself. He would not surrender at any point." Other analysts have noted, however, that when Saddam appeared to be facing defeat in the Iraq-Iran war during the mid-1980s, he sought a diplomatic settlement.

Copely said Saddam appears to have "committed vast stocks to the garrison in Kuwait . . . foreseeing that the U.S. would try to cut his supply lines. Anybody who has a built up a position in an urban setting has a number of advantages, because you're not dealing just with concentrations of troops. You have to flush them out of every building, and you can never be sure you've secured an area. It's a very arduous and dangerous form of fighting." He added that urban warfare "removes the advantages of air superiority" enjoyed by the United States but that "you'd have a hell of a lot of tank and rocket warfare."

Even if Kuwait City were isolated and the war limited to desert terrain, Khalidi said, U.S.-led ground forces would still be at somewhat of a disadvantage compared to their Iraqi counterparts, who already have eight years of experience fighting in such conditions. "You have not just the possibility of urban warfare, but the problem of warfare in marsh and river and wetland areas," he said. It could also "involve fighting in areas that are either built up {with military fortifications} or that include oil installations . . . and God knows what that'll entail."

Bayne noted reports early in the occupation of Kuwait that Iraq had booby-trapped oil installations and other strategic facilities throughout the sheikdom, lending credence to the idea that Saddam is bent on wanton destruction.

Journalists who returned here today from a visit to the Iraqi-Saudi border said that Iraq has clearly dug in for a long war and that the Iraqis appear to be employing the same defensive strategy they used along the southern battlefront during the 1981-88 Iran-Iraq war. The journalists described row after row of trenches, bunkers and concrete-and-earthen berms, along with heavy artillery and antiaircraft installations along a highway leading to the Saudi border.

One reporter said the fortifications were visible "for as far as the eye can see" on the Iraqi side of the border, northwest of Kuwait, and he described an unusually long concrete-covered bunker that stretched for dozens of miles along a main highway. The ground on either side of the bunker was studded with foxholes, the journalists said, and Iraqi officials warned them that the area was heavily mined.

Whatever its military strategy, Iraq is clearly trying to give the outside world the impression that the human price of any war may be greater than the U.S.-led alliance is prepared to accept. "As Jan. 15, the war deadline, draws nearer, the cries of desperation coming from the other side of the Atlantic get more and more frenzied," the Baghdad Observer said. "Bush and his pawns are obviously in a hysterical mood now that Iraq has already won the first round of the war, the psychological battle. . . . Iraq, for its part, is playing it cool. It has remained unshaken by the physical and verbal U.S. threats."