BAGHDAD, IRAQ, OCT. 15 -- Gathered around the dinner table, the Iraqi family was keeping tabs on the news. The television was on, the sound down low. Two radios were tuned to Arabic news broadcasts.

When a newscaster announced that "the United States says that even if Iraq recognizes Kuwait it is not sufficient to lift sanctions," something between a groan and sardonic laughter filled the room.

"And what about us?" one family member asked plaintively.

"Nothing is sufficient," said his relative with bombastic sarcasm, "until all the Iraqi people are dead. Really, this is what we now believe."

Their remarks reflected the sense among Iraqis that amid the protracted tug-of-wills between Washington and Baghdad, those bearing the brunt of the U.N. sanctions on this country have been all but forgotten.

Signs of Iraq's agony -- due in large part to the U.N. trade embargo, imposed after Iraq invaded Kuwait in 1990 -- are abundant in this once prosperous, oil-rich country. The health care system, once among the best in the Middle East, is in shambles; Baghdad's raw sewage is being dumped for the third straight year into the Tigris River, the main source of drinking water; more babies are dying of malnutrition; the proportion of young girls dropping out of elementary school is up to 17 percent from 2.3 percent; crime and corruption are up; the educated are leaving and the middle class is in ruins.

But the potential political repercussions for the United States also have gotten little attention.

Iraq's integrity as a state and society is considered essential for stability in this region because of its potential as a major oil producer and its strategic location among Iran, Turkey, Syria and Saudi Arabia.

But in a country of volatile sectarian tensions and increasing lawlessness, there is a risk, Iraqis and foreign diplomats warn, that Iraq's social, economic and political decline will reach the point of no return.

"If developments in Iraq get out of control, we may expect destabilization which will spread to some neighboring countries, and so this means a threat" to the West's access to oil, said one envoy here. "If Iraq is squeezed too much, it will give a spoiled effect to the region."

The sanctions also have generated anti-American sentiment among Iraqis that some observers fear could be exploited, either by Iraqi President Saddam Hussein -- if he survives the U.S. challenge to his leadership -- or by Islamic fundamentalists.

Many Iraqis have long admired the United States, where many were educated and many more have relatives. But they express bewilderment and anger at U.S. insistence on maintaining open-ended sanctions now that Iraq is out of Kuwait and is complying with U.N. demands for the destruction and long-term monitoring of its banned weapons, according to the highest-ranking U.N. official monitoring those programs, Rolf Ekeus.

"You read in the papers, everyone says lift sanctions and America says no. Nobody knows why," said Adnan Jabero, chief of Baghdad's water and sewage system, who spent seven years in the United States while obtaining a doctorate in environmental engineering from the University of Michigan.

"The interference of the government of the United States is affecting the opinion of the Iraqi people {toward} the United States. They cannot differentiate between the government and the people," Jabero said.

Noting the absence of protest by Americans against U.S. policy on Iraq, Jabero said Iraqis "have the impression that Americans are careless about whether Iraqis live or die.

"Still," he added, "I like Americans. They are lovable people."

A European diplomat stationed in the Middle East was more blunt: "To see these 20 million people who've suffered so much, I don't see them being able to forgive and forget what's been done to them.

"And the fact that this resentment could be exploited in the future is a major concern. I think it's a shortsighted policy to punish the Iraqi people for not being able to overthrow their regime.

"The concern is that Iraq could no longer be a secular state in the future, which could damage the whole region."

Adding to Iraqis' sense of injustice is the contrast between their punishment and that meted out to Israel when it failed to comply with U.N. resolutions. "People say, 'Look at Israel. So many resolutions and what happened?' " noted another envoy here.

To all these arguments, U.S. officials say Saddam is the reason for the Iraqis' hardships -- that he could obtain money to buy essential food and medicine by accepting a U.N. offer to sell $1.6 billion worth of oil. He has refused to do so on the grounds that U.N. conditions for monitoring distribution of these items infringe on Iraq's sovereignty.

But the United States has declined to unfreeze Iraqi government funds seized in 1990 after the invasion of Kuwait. However unintended it may be, the upshot of U.S. policy toward Iraq is that humanitarian concerns have taken a distant second to strategic interests -- with the end nowhere in sight.

Iraq's devastated economy is wracked by inflation caused by uncontrolled printing of money. Banks have abandoned the official exchange rate of three Iraqi dinars per dollar and are now giving 550 dinars for a dollar.

Traffic in Baghdad is noticeably lighter than a year ago, as spare parts are impossible to obtain. Long lines form daily outside pharmacies and banks. And Baghdad's water supply system is operating at only 50 percent capacity, leaving neighborhoods farthest from the main pumping station without running water, according to Jabero.

Jabero's water department has run out of imported stainless steel clamps for repairing broken pipes. "Now we are using rubber tire and steel wires," he said. "We used to repair a pipe within a half hour. Now it takes three to four hours and we are lucky if it doesn't break again."

Malnutrition, once rare in Iraq, is widespread, especially among infants. And a 1993 UNICEF survey of more than 8,000 adults found over 50 percent suffering from goiter because of iodine deficiency due to low salt intake.

All this will likely be exacerbated by a government decision Sept. 24 to reduce by almost 40 percent the amount of flour, rice, oil and sugar in monthly food rations. The reductions have decreased the protein content and caloric value of each ration package by about 36 percent, a recent UNICEF report said.

Before the decrease, implemented Oct. 1, these rations "definitely kept starvation at bay in the poorest sections of society," the report said.

The government has said it will give government employees and military personnel 2,000 Iraqi dinars (about $4) a month to buy food on the open market to replace the missing portion of the rations. But about 3.6 million other Iraqis -- including more than 500,000 children under age 5 -- will not have enough money to buy food to compensate for the reduced rations.

Perhaps anticipating an adverse reaction to the rations reduction, the government issued orders in August that Baghdad residents who arrived here after the 1991 Persian Gulf War must return to their home villages, diplomats and Iraqis said. No one knows how many people have been forced from their homes by the directive, which some sources said was applied most strictly in poor neighborhoods.