Iraq yesterday offered for the first time to withdraw from occupied Kuwait, but hedged the offer with numerous conditions. President Bush dismissed the proposal as a "cruel hoax" and challenged Iraqis to stop the "bloodshed" by overthrowing President Saddam Hussein.

The announcement from Iraq's ruling Revolutionary Command Council triggered jubilant celebrations in war-battered Baghdad and an electric air of anticipation elsewhere in the world that an end to the 30-day-old Persian Gulf War might be in sight.

But that hope quickly ebbed as the long Iraqi communique began to make clear that a pullout would be contingent on several key conditions unacceptable to the United States and its allies, including Israel's withdrawal from the West Bank, Gaza Strip and Golan Heights, the departure of all foreign forces from the Persian Gulf region within a month of a cease-fire and the payment of allied reparations to help rebuild Iraq.

Less than four hours after Radio Baghdad began broadcasting the proposal, Bush sharply rejected it at 10 a.m. in comments to a group of scientists gathered in the Old Executive Office Building. "When I first heard that statement, I must say I was happy. . . . Regrettably, the Iraq statement now appears to be a cruel hoax, dashing the hopes of the people in Iraq and, indeed, around the world."

Denouncing the "unacceptable" conditions in the proposal, Bush again demanded that the Iraqi army vacate Kuwait without "linkage to other problems in the area." Not "until a massive withdrawal begins, with those Iraqi troops visibly leaving Kuwait," would the relentless allied air war be suspended, the president added.

The president's uncompromising language got even tougher later in the day as he told a roaring crowd at the Raytheon Co.'s Patriot missile plant in Massachusetts: "I am going to stay with it. We are going to prevail, and our soldiers are going to come home with their heads held high." He said other members of the international coalition against Iraq also had pronounced the Baghdad initiative "dead on arrival."

Several senior U.S. officials yesterday said Iraq would have to abandon some of its combat equipment to meet the administration's demand for a quick and unequivocal pullout, a condition that appeared to up the ante for any Iraqi capitulation. Pentagon officials said allied warplanes still have orders to destroy any Iraqi military equipment that can be found. "One way to get bombed is to be in a tank," a senior Pentagon official said. "Another way to get bombed is to be in an APC {armored personnel carrier}. The best way not to get bombed is to walk -- walk north or walk south."

Bush's call for a popular insurrection or military coup to topple Saddam was the most explicit such appeal from the White House since Iraq invaded Kuwait Aug. 2. "There's another way for the bloodshed to stop, and that is for the Iraqi military and the Iraqi people to take matters into their own hands, to force Saddam Hussein, the dictator, to step aside," Bush said.

The president's appeal was not based on specific intelligence evidence of a potential Iraqi rebellion, a senior administration official said later, but rather on reports of disgruntlement in some military ranks and desperation among average Iraqis to end the war. Similar assessments appeared to spawn unconfirmed reports in Moscow and elsewhere that a coup attempt was underway in Baghdad. In Jerusalem, a senior Israeli government official said the only substantive suggestion of a challenge to Saddam's rule was the unusual, though not unprecedented, omission of the Iraqi president's name from yesterday's official communique.

U.S. allies generally echoed Bush's denunciation of Baghdad's proposal. British Prime Minister John Major, for example, described the offer as "a bogus sham." One of the few voices of optimism in world capitals came from Soviet Foreign Minister Alexander Bessmertnykh, who said Iraq's "encouraging" proposal had opened "a new chapter in the history" of the war.

Moscow Negotiations

Moscow's efforts to negotiate a cease-fire are expected to continue this weekend when the Kremlin hosts Iraqi Foreign Minister Tariq Aziz -- a mediation effort the Bush administration publicly endorses but only if it leads to an unconditional Iraqi withdrawal as demanded by the United Nations Security Council. Bessmertnykh attempted to assuage U.S. concerns yesterday afternoon by returning a telephone call from Secretary of State James A. Baker III and assuring him that Moscow is "not interested in accepting anything short of the U.N. resolutions" demanding Iraq's withdrawal from Kuwait and the restoration of Kuwait's legitimate authorities, a State Department official said.

While allied leaders were quick to reject the Iraqi overture, diplomats and government officials were equally quick to see it as symptomatic of Baghdad's disintegrating military predicament. Some even saw it as the most significant diplomatic development from Baghdad in the past six months, the first crack in what had been an unflinching intractability. "Iraq is blinking and may be rethinking its policies," said Rep. Lee H. Hamilton (D-Ind.), chairman of the House Foreign Affairs subcommittee on the Middle East, voicing an assessment made by many on Capitol Hill.

Ground War Speculation

Speculation intensified yesterday in Washington and Saudi Arabia that the allies may be close to launching their ground offensive, although Marine Brig. Gen. Richard I. Neal denied that Gen. H. Norman Schwarzkopf, commander of Operation Desert Storm, has been given authorization for such an attack. The positioning of Marine and Army forces along the extreme northern Saudi border, coupled with the disclosure Thursday that roughly one-third of Iraq's armor and artillery forces in Kuwait have been destroyed, suggested that the battlefield has been considerably "softened" by air attacks.

"We've been in position, locked and cocked, for two days," a Pentagon official said yesterday of the U.S. forces in Saudi Arabia. Others observed that a fourth aircraft carrier -- out of six U.S. carriers in the region -- had been moved into the Persian Gulf, closer to the Kuwaiti battlefield.

Yesterday's diplomatic flurry appeared to have no impact on the allied war effort, as warplanes flew another 2,600 sorties, including 800 against targets in greater Kuwait. "Our mission remains the same," Neal told reporters in Riyadh, Saudi Arabia. "United States forces and the coalition forces will continue to execute our mission of attempting to eject Iraqi forces from Kuwait."

The realization that Iraq had tied unacceptable conditions to its withdrawal offer quickly overcame "an initial blush of excitement that, hey, maybe this thing is over and we can all go home," Neal said, describing the response of U.S. troops in Saudi Arabia.

Neal alluded to the dilemma facing both Iraq and allied forces with respect to a possible withdrawal from Kuwait. Any Iraqi emerging from their fortifications "may be just relocating, repositioning forces. So until we're notified by higher authority, we're going to continue to execute our mission as it's been handed down to us," the general said, a clear allusion to the unceasing bombardment.

Except for minor repositioning to consolidate Iraqi units badly battered by air strikes, the Iraqi army hasn't "done much except hunker down. And I think we've got them between a rock and a hard spot," Neal added. "We're able to take care of them in a hunker-down position, and if he wants to move, that's even more to our advantage." Reflecting the widespread U.S. military conviction that the allied campaign has Iraq reeling, Neal added, "I don't think there's any reason for us to start tweaking that campaign."

'Campaign's Going Good'

At the Pentagon, Lt. Gen. Thomas Kelly, operations director for the Joint Chiefs of Staff, said he would "strongly recommend" that there be no pause in the bombing, which could give Iraqi forces "an opportunity to regenerate." Kelly added: "My recommendation to my bosses {the Joint Chiefs}, who talk to the president, would be the campaign's going good. There is no military reason that I know of to change anything we're doing."

Of more than 400 Iraqi soldiers who "have turned themselves in to U.S. forces" in the past month, "a significant number" are veterans of the Iran-Iraq war and "almost to a man they're extremely tired of war," Neal said. At the Pentagon, Kelly added, "If I was in the Iraqi army and I'd devoted my life to it and I saw it being destroyed for no reason, no reason at all, I'd be having second thoughts."

A Navy A-6E was lost when the bomber crashed while trying to land on the carrier USS America, but both of its crew members ejected and were rescued with only minor injuries, Neal said. In other combat action, an Air Force F-15E looking for Scud missile sites destroyed a hovering Iraqi helicopter with a laser-guided bomb, a munition usually directed against ground targets.

British aircraft, exploiting the high pressure system that has brought continuing fair weather over Iraq and Kuwait, "struck at the Iraqi air force main operating bases in western and east central Iraq," destroying 19 hardened aircraft shelters, according to Group Capt. Niall Irving. One Tornado was destroyed by a surface-to-air missile. Jaguar bombers over central and northern Kuwait attacked rocket launchers and artillery sites, Irving said.

U.S. military officials in Riyadh last night said Iraq had launched a Scud missile attack at the Saudi industrial port city of Jubail and that the Scud was intercepted by a Patriot missile and fell harmlessly into the Persian Gulf.

Yesterday's conditional offer from Baghdad, first broadcast to the world in a statement monitored on Cyprus around 6:30 a.m. (EST), quickly dominated news programs and triggered a short-lived elation. Financial markets rallied, Arab opponents of Saddam greeted each other with exclamations of "Mabrouk!" -- congratulations -- and one commuter in New York's Pennsylvania Station was heard yelling, "The war's over! They've surrendered!"

Civilians and soldiers alike took to the streets of Baghdad to discuss the development and spray the sky with automatic weapons fire in jubilation. "The world left us no choice. We must leave Kuwait," an Iraqi man told a Cable News Network team in the capital city. "It no make sense. No food, no medicine, no electricity. So what can we do?"

Bush heard the news on television before 7 a.m. and walked to the Oval Office to meet with national security adviser Brent Scowcroft, according to White House officials. Joined by Baker and Defense Secretary Richard B. Cheney, they spent the next hour reading reports from the Foreign Broadcast Information Service (FBIS), a government agency that monitors and translates information from abroad.

New Offer's 'Fine Print'

An official said the FBIS reports "came trickling" into the Oval Office and, as Bush would say later, "the more we got, the worse it looked." The Iraqi offer explicitly linked a pullout from Kuwait to an Israeli withdrawal from occupied territories, and stipulated that any refusal by Israel be punishable by the same U.N. sanctions imposed on Iraq. The communique demanded "cancellation of all Iraqi debts and those of the region's states which were harmed by the aggression."

While Iraq had sought since the Aug. 2 invasion of Kuwait to link a settlement to an Israeli withdrawal, yesterday's communique imposed several new conditions, including removal of "the armament and equipment which some states have supplied to Israel" -- an apparent reference to Patriot missile batteries -- and a demand that the allies "undertake to rebuild what the aggression had destroyed in Iraq." The communique ended with an appeal to God and a rhetorical blast at "the perfidious, the treacherous and their imperialist masters."

Bush and Baker, having read enough of the proposal to develop a deep distaste for it, began calling foreign leaders to be sure their sentiments were shared by the allies. "The ones we've talked to are all on solid {ground} and got on this thing the minute they saw the declaration coming out," Bush subsequently declared in a question-and-answer session at the Raytheon plant.

Bush grew increasingly dismissive as his day wore on. In his initial midmorning statement, he noted the Iraqi statement had at least proposed complying with the first of a dozen U.N. resolutions, which was passed the day of the invasion and simply demanded Iraq's unconditional immediate withdrawal from Kuwait. By midday, however, the president, said the statement contained "nothing new or significant," and that "the fine print . . . was a step backwards."

He appeared particularly incensed at the suggestion that American taxpayers be asked to underwrite the damage wreaked on Iraq. "It's the other way around," the president declared. "Reparations sanctions are called for under the United Nations, reparations so Iraq undoes the damage that it's done."

Bush also repeated his own tough line on how the war must end. "There will be no pause, there will be no cease-fire," he said, until "the legitimate rulers, the legitimate government, {is} returned to Kuwait, and until a credible withdrawal begins, with those Iraqi troops visible leaving Kuwait."

Rousing Reception for Bush

The president appeared to be buoyed by the rousing reception given him at the Raytheon plant, where Scudbuster sweatshirts and American flags dominated the scene. Touting the 17-foot missile that has become one of the unexpected heroes of the war, Bush declared, "42 Scuds engaged, 41 intercepted." The tougher Bush's rhetoric, the louder the roar from workers who had chanted "U-S-A! U-S-A!" when the president took the stage.

After his speech, Bush flew by helicopter to his ocean home in Kennebunkport, Maine, where he plans to spend the weekend. A White House official said the administration expects "some heavy diplomatic activity over the next few days. There are more shoes to drop, we believe, if you consider this one of a number of cards {Saddam} may play as his situation becomes more desperate."

The upcoming meeting between Iraq's Aziz and Soviet President Mikhail Gorbachev could produce "a new variation" of yesterday's proposal "with one or two fewer" conditions, the official predicted.

A closed-door session of the U.N. Security Council adjourned last night without any news on a debate started Thursday about the war in the gulf.

Atkinson reported from Washington, Balz from Andover, Mass., with the president. Staff writers Ann Devroy, E.J. Dionne Jr., Barton Gellman, David Hoffman and R. Jeffrey Smith in Washington, David Remnick in Moscow, Nora Boustany in Jordan, William Drozdiak in Paris and staff researcher Ralph Gaillard Jr. contributed to this report.