WHEN the Middle East peace conference finally convenes, there may not be a Palestine Liberation Organization (PLO) representative at the negotiating table. It is not the finest hour in the PLO's long and turbulent history, but it is not a defeat either. With or without a PLO presence at the conference, the organization and its chairman, Yasser Arafat, have placed the plight of the Palestinian people at the forefront of the world's agenda.For the moment, however, the PLO must accept the reality that there's a price to pay for embracing Saddam Hussein. The road to rehabilitation is long and uncertain. But even if the political focus has shifted from Tunis to the West Bank and Gaza, the PLO is critical to the Israeli-Palestinian equation. The current tendency shared by Israel and the Arab states - especially Egypt, Syria, and Saudi Arabia - to discount the PLO may prove, in the end, self-defeating. The PLO continues to enjoy vast popular support throughout the West Bank and Gaza - and also in Jordan - for three important reasons: * Both the Arab states and Israel, for different reasons, have failed to encourage the development of independent local leadership. Although Palestinian leaders such as Faisal Al-Husseini and Hanan Ashrawi have been negotiating with Secretary of State James Baker, they still look to the PLO for approval and guidance. The absence of the PLO in this climate would create a vacuum of leadership likely to boost the growing strength of the fundamentalist Palestinian movement Hammas and other hardliners who rej ect negotiations. * The PLO continues to maintain an extensive socioeconomic infrastructure with considerable impact on the daily lives of Palestinians in the territories. * No Arab states have challenged the legitimacy of the PLO as representative of the Palestinian cause. That is why, whether present at the peace conference or not, both Israel and the Arab states know that, notwithstanding the PLO's tarnished political image, there can be little substantive progress made on the Israeli-Palestinian front without the PLO's endorsement. Having embraced Saddam, Arafat is fully aware that the PLO's ability to advance Palestinian interests has diminished. He knows that for the PLO to redeem itself and regain lost political ground it must mend relations with Saudi Arabia, Egypt, and Syria - the richest, the largest, and the most nationalist of the Arab states respectively. Ironically, the leaders of these countries may need to help Arafat rehabilitate himself, not only to contain the PLO but as a way for the organization to play a fruitful role. Israel, while rejecting direct PLO involvement in peace negotiations, would probably condone a behind-the-scenes role for the PLO that could facilitate an interim agreement with the Palestinians. The PLO has a serious stake in the success of the negotiations. Any further deterioration of Palestinian conditions in the territories would reflect upon its leadership - further undermining the PLO's already weakened position. For this reason, the PLO will have to allow for the emergence of untainted Palestinian leadership and yield to the Israeli demand that no Palestinian from East Jerusalem or known PLO member be present at the conference. It is understandable the PLO wants a face-saving formula in return for accommodating the Israeli demand. One route could be a meeting between Yasser Arafat and Egypt's president Hosni Mubarak, along with a resumption of dialogue with the US - each offering Arafat the needed political cover (assuming Arafat reaffirms the organization's renunciation of terrorism and pledge to prosecute terrorist acts). The PLO, which has shown enormous resiliency over 27 years, must now adapt to a new, post-Gulf-war reality. The Palestinians are facing a crossroad. One road will bring them closer to their national dream. The other may well condemn another generation of young men and women to destruction and despair. The PLO, having dealt itself out of the current negotiating process, must now stay out - and allow for new leaders.