BAGHDAD, IRAQ, JAN. 7 -- Iraqi President Saddam Hussein has told a French legislator that he is prepared to make certain "sacrifices" in return for guarantees that Iraq will not be attacked and that its economic and regional-security problems will be addesssed by the international community, according to a Western diplomat here.

The source, who was briefed on Saddam's 4 1/2-hour meeting Saturday with French Deputy Michel Vauzelle, quoted the Iraqi leader as asking Vauzelle, "What is dialogue" if it doesn't involve "sacrifices on both sides?"

Saddam did not say outright that Iraq was prepared to discuss a withdrawal from Kuwait, the source said, but his use of the word "sacrifices" came in the context of talks with Vauzelle on measures Iraq could take to avoid an attack by U.S.-led forces deployed in Saudi Arabia.

According to this source, Saddam told Vauzelle -- an ex-spokesman for President Francois Mitterrand -- that Iraq is prepared to make the sacrifices in return for three guarantees: first, that Iraq will not be attacked; second, that measures will be taken, presumably through the Organization of Petroleum Exporting Countries, to stabilize the price of oil and increase Iraq's oil-production quota; and third, that a regional security framework can be established balancing Iraqi concerns with those of Israel and Iran.

Notably absent from this account of Saddam's demands is his previous emphasis on linking discussion of the Palestinian problem to resolution of the gulf crisis.

Despite the wide-ranging discussions with Vauzelle, diplomats here said today that Iraq had played down all non-U.S. diplomatic initiatives, including a French plan, in a last-ditch drive to reach some sort of accord directly with the United States.

Now topping the list of Iraqi priorities, they said, was an effort to persuade Secretary of State James A. Baker III to come here after his meeting Wednesday in Geneva with Iraqi Foreign Minister Tariq Aziz. Without a direct meeting between Baker and Saddam, the chances for peaceful resolution of the crisis would be drastically reduced, they added.

{In London, aides to Baker reiterated that he will not go on to Baghdad for further talks.}

The diplomats here also noted that top Iraqi officials -- including Saddam -- are signaling increased flexibility on a number of key demands and appear to be relaxing the government's previously hard-line stance about holding onto Kuwait. These diplomats have some access to Iraqi officials. However, Saddam's fundamental positions remain closely held.

In the last few days, one foreign official said, the Iraqis have shown "some kind of flexibility" in their private talks with European and Arab envoys. But in public, he explained, they have maintained a hard-line stance because "when you are going to the negotiating table, you must take the extreme position" to have more leeway for bargaining.

This diplomat said the Iraqis have made clear that Aziz is not going to Geneva simply to hear Baker repeat the U.S. threat of attack if Iraq does not withdraw. If Baker takes this stance, the diplomat said, "the Iraqis will be very, very tough. They can be very predictable in this regard, especially if you try impose some kind of toughness on them."

An editorial today in the official Baghdad Observer underscored the point that Iraq wants to reach an accord with the United States and questioned the purpose of the Geneva talks if there is no room for negotiation.

"George Bush and some of his Western allies . . . say that the U.S. has no intention of holding dialogue or negotiations with Iraq, thus implying that the whole 'extra mile for peace' of Bush was no more than a propaganda ploy," the editorial said.

"Bush seems to be intent on attacking Iraq," it added. "However, things in Iraq come out to be totally different. Whether on official or population levels, the last thing any Iraqi wants is war."

One diplomat said that despite Iraq's desire to focus its energies on the Geneva talks, it is sending messages through envoys to Saudi Arabia that Baghdad "is ready to give some concessions . . . to show flexibility" on the question of restoring Kuwait's sovereignty and permitting the return of the ruling Sabah family.

This diplomat and others said today that efforts by European and Arab mediators apparently are still taking place to resolve the gulf crisis. In recent days, diplomats have talked about a proposal afoot for Iraq to withdraw from Kuwait in exchange for a promise by Kuwait's leaders to let Iraq lease two strategic Persian Gulf islands. Kuwait would also agree not to pump oil from the Rumailah oil field, which the two countries previously shared.

Saudi Arabian King Fahd indicated on Sunday that his kingdom could agree to such an arrangement. "First they withdraw," he told reporters. "Then, if there is any demand by Iraq to Kuwait, the two countries should sit together and discuss the matter between themselves, and whatever they agree on, we will support."

Among concessions Iraq is prepared to make regarding its previous demands, sources said, is that Saddam would be willing to soften his demand that the Palestinian issue be taken up by an international conference on the Middle East. This could not be confirmed with Iraqi officials.

Saddam "has basically dropped the Palestinian issue" as a demand in negotiations, one source said, adding that the president has continued pressing the Palestinian issue in his public statements because he wanted to avoid the appearance of backing down. But "the Palestinians are no longer a priority," the source said, adding that Saddam now believes it would suffice for the United States to make another expression of intent to hold an international conference on the Middle East at a later date.

Reuter added from Baghdad:

Saddam warned in a speech broadcast Monday that Iraq's battle would extend to the entire world.

His warning raised the specter of guerrilla attacks on U.S. and other Western targets abroad and those of their Arab allies if war erupts over Iraq's Aug. 2 seizure of Kuwait. Radical Baghdad-based Palestinian groups have already made such threats.

"The main weight of the military battle may be Iraq, but the theater of our operations {includes} every struggler and fighter whose hand can reach out to harm . . . aggressors in the whole world," Saddam told his top army commanders Sunday night.

"The basic dimensions of this battle cover not just Iraq but the whole {Arab} nation's land and wherever the sons of the nation exist," said Saddam, whose address was broadcast by official Baghdad radio. He said a war alert existed not only in every Iraqi town but "in Algeria, Jordan, Egypt and inside every heart and conscience of any Syrian."