President Reagan and key Arab representatives appear to have advanced one step closer to a settlement of the Arab-Israeli conflict.
But the two most important players in the diplomatic game - Israel and the Palestine Liberation Organization (PLO) - were absent from the talks held here last week between Mr. Reagan and Arab League representatives. The Israelis and the Palestinians hold a veto over the whole process. They could easily bring the game back to square one.
The next big move in this high-stakes game could be a meeting of the Palestine National Council (PNC), the PLO-dominated Palestinian parliament-in-exile. The PNC is expected to meet late this year. The Americans want the PLO to authorize Jordan's King Hussein to enter talks that would include Israel. Israel refuses to talk with the PLO, but it might talk with Hussein.
Being unsure, however, of the outcome of such talks, and of the US commitment to ensuring Palestinian rights, the PLO is reluctant to give Hussein the mandate the US is seeking. It's ironic that having been ousted from Lebanon and dispersed, the PLO now has the political clout to say ''no'' to everyone.
''The PNC is the $64 question,'' says a source close to Saudi Arabia's foreign minister, Saud al-Faisal - a leading member of the Arab League delegation.
And Reagan's peace plan faces yet another stumbling block in Lebanon, where the continuing presence of Israeli and Syrian troops detracts from the American initiative.
But the representatives of six Arab League nations who met with Reagan Oct. 22 felt there had been an ''atmospheric breakthrough'' between the Arabs and Americans: Mutual understanding had been enhanced. The Arabs wanted to know how firm Reagan's commitment was to pursuing his peace plan, given Israeli opposition. Reagan assured them of the strength of that commitment.
US officials were encouraged by statements by King Hassan of Morocco, the delegation's spokesman. He said the Arabs want to live in peace with Israel. The king added, however, that the Arab nations would extend recognition to Israel only after Israel surrenders the remaining territories - including the West Bank of the Jordan River, the Golan Heights, and the Gaza strip - it has occupied since the 1967 Arab-Israeli war.
In his Sept. 1 peace initiative, Reagan reaffirmed American support for United Nations resolution 242, which in effect calls for Israeli withdrawal from occupied territories in return for Arab recognition of Israel behind secure and defensible borders. The Reagan plan also endorses the concept of confederation between Jordan and a Palestinian entity on the West Bank, but not the independent Palestianian state which is advocated by the Arabs.
Some of the Arabs left here indicating they still have their doubts as to Reagan's commitment to stick with his peace plan in the face of Israeli pressure. One Arab diplomat says that among the documents the Arabs submitted to the Americans during the visit was a question: What does the US plan to do about the continuing buildup of new Israeli settlements on the largely Arab populated West Bank.
As part of his initiative, Reagan called for a freeze in such settlements. The Israelis ignored that call and almost immediately announced new settlements.
What all this adds up to, in the view of diplomats, is at least several more months of arduous, high-level negotiation among the parties to the Arab-Israeli conflict. After a summer of war in Lebanon comes a long winter of hard bargaining.
King Hussein of Jordan is tentatively scheduled to visit Washington in November. Egypt's President Hosni Mubarak is to be here in December. Saudi Arabia's King Fahd is expected early next year.
But Reagan's advisers, as well as the Arab League delegates, seem to agree that unless substantial progress is made by early next year, the President's initiative may collapse.
The Arabs calculate that next year will mark the beginning of major election campaigns for the Israelis and the Americans, perhaps curtailing the flexibility of both. By the fall of 1983, Reagan is likely to be preoccupied with his own reelection prospects. If he chooses to run again, the President would begin courting pro-Israeli voters in earnest, diminishing his ability to exert pressure on Israel, Arab diplomats say.
Clovis Maksoud, the Arab League ambassador here, sees three reasons for hope. As he describes it, there is now a ''conjunction of circumstances which is in a way unique:''
* While it does not go far enough in the Arab view, Reagan's initiative places a heavy emphasis on Palestinian rights.
* The recent Fez summit meeting of Arab nations ''legitimized the peace option'' as far as the Arabs are concerned.
* And a growing ''constituency of conscience'' among Jews in Israel and the US has been emboldened by events in Lebanon to speak out in an articulate way in favor of peace with the Palestinians.
''It was painful to arrive at the three circumstances,'' says Ambassador Maksoud, ''and they would be easy to undermine. They are not everlasting. We must utilize them to bring about a rational settlement.''