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Yasser Arafat`s Palestine Liberation Organization, battered militarily and diplomatically by both Israel and the Arabs, has launched a desperate guerrilla offensive aimed at restoring the organization`s waning strength and credibility, Arab, Israeli and Palestinian sources said.

The PLO`s military commander, Khalil Wazir, announced last week from his new headquarters in Baghdad that the organization had decided to ”step up military operations inside occupied Palestine.”

The PLO has issued similar threats in the past. But experts who follow the fluctuating fortunes of the PLO are paying particular attention to its latest pronouncements, noting that the guerrillas` shrinking set of options have made the offensive Arafat`s only virtual means of political expression.

”The PLO is in trouble, and now it`s fighting back,” said Ehud Yaari, an Israeli expert on the PLO.

Middle Eastern political and military analysts now are predicting a sharp escalation of PLO violence against Israel and retaliatory Israeli measures, including more air raids against Palestinian targets in Lebanon and possibly draconian security measures in the occupied West Bank and Gaza Strip.

Moreover, with Israel`s new hard-line Prime Minister Yitzhak Shamir in office, these analysts believe the chances for a negotiated peace between Israel and the Arabs will recede dramatically in the anticipated storm of strikes and counterstrikes.

The opening shot of the PLO offensive was fired Oct. 15 when guerrillas lobbed a grenade into a parking lot, killing one man and wounding 70 other people, after a swearing-in ceremony for new Israeli soldiers at Jerusalem`s Wailing Wall. An Israeli security expert conceded the attack was

”uncharacteristically well planned and executed.”

The PLO issued a statement from its Cairo office, saying more military operations in the occupied territories would follow in response to ”schemes to liquidate the Palestinian problem.” The Jerusalem attack was meant to underscore once again that a Middle East settlement ”remains an impossible dream” as long as peace efforts ignore the organization`s existence, the PLO said.

Israel retaliated for the attack with an air raid against PLO bases near Sidon in southern Lebanon, losing an F-4 Phantom bomber to groundfire. One of the plane`s two crewmen was captured.

Israeli, Arab and Palestinian analysts view the grenade attack as a dramatic but desperate attempt by the PLO to reassert its standing in the West Bank and its credibility among the splintered Palestinian resistance groups and sympathetic Arab states following a succession of military and diplomatic setbacks.

Since Israel invaded Lebanon in 1982 to force the expulsion of the PLO, the organization has split into pro-Arafat and pro-Syrian factions and fought savage battles in Lebanon against pro-Syrian Shiite Moslem militiamen. In addition, Israel bombed Arafat`s headquarters in Tunis a year ago.

Last February, Jordanian King Hussein ditched Arafat as a partner in their year-old joint peace initiative, closing down the offices of the PLO`s mainstream Fatah group. Since then, Amman has launched a vigorous campaign

–with Israel`s tacit cooperation–to rebuild Jordan`s political influence in the West Bank at the expense of the PLO.

The latest setback for the PLO occurred earlier this month when Tunisia said it no longer was willing to host the PLO`s headquarters. Last week, Arafat announced in Kuwait that he was moving his military command posts to North Yemen and Iraq.

”Politically, Arafat is feeling the greatest pressure from Jordan`s campaign to undercut the PLO in the West Bank,” said Oded Zarai, a commentator for the respected independent Israeli newspaper, Haaretz.

Palestinian sources confirmed that despite a recent poll that showed 71 percent of the West Bank residents support Arafat, several key professional unions in the territory–bastions of pro-PLO support in the past–have shifted their allegiance to Amman.

Jordan also has widened its influence in the territory with the recent establishment of the first Arab credit bank there since 1967, and Israel`s appointment of pro-Jordanian mayors in three major West Bank towns.

Aware of Arafat`s popular support in the urban centers, Jordan now is focusing its West Bank political efforts on the territory`s rural areas, which have a larger and traditionally less nationalistic population, Zarai said.

Israel is allowing Jordan to unite the village farm marketing cooperatives into a single economic entity, which also will be a powerful centralized political channel, Arab and Israeli sources said.

According to pro-PLO sources in the West Bank, such Jordanian moves have infuriated Arafat, who has called on Amman to lift its restrictions on the PLO. At the same time, Arafat`s top diplomat, Farouk Kaddoumi, told Arab foreign ministers meeting in Tunis this month that such measures violate Arab summit decisions that recognize the PLO as the ”sole legitimate representative” of the Palestinian people. So far, Jordan has ignored the PLO`s arguments.

”With its political options rapidly evaporating, the PLO is being forced to turn to its military option. It`s now or never. He must show his people that he`s doing something,” one West Bank Arafat supporter said.

Analysts note the PLO`s decision to claim responsibility for the Jerusalem grenade attack from its Cairo offices was significant. It was from the Egyptian capital last November that Arafat issued his ”Cairo

Declaration,” in which he called off all terrorist attacks on Israeli and Jewish targets outside Israel but reiterated the Palestinian people`s right to resist inside the Israeli-occupied territories.

Amid the PLO`s growing isolation in the Arab world, the Cairo claim of responsibility underscored Arafat`s need to demonstrate continued Egyptian support, analysts said. Egypt–the only Arab nation to sign a peace treaty with Israel–responded to the claim by calling in the chief PLO official in Cairo and reprimanding him.

Any hopes by Arafat that a renewed guerrilla offensive will help heal the rift in the PLO appear to have been set back by the assassination last week of a senior Arafat loyalist in Athens. A radical group calling itself the Palestinian Revenge Organization, believed to be Syrian-backed, claimed responsibility for the killing and warned against any Middle East solution based on talks with Arafat.

Ironically, the only good news for Arafat recently has come from the United States. Following the Jerusalem grenade attack, Israel called on the Reagan administration to close down the PLO`s Washington information office;

White House officials refused.