HAVING returned from his sixth mission to the Middle East since March, US Secretary of State James Baker III is resting up from exertions that have brought a Middle East peace conference inches from reality.Mr. Baker has not previously been known for a jet-shuttle, Kissingeresque style, and the effort he has devoted to the prospective conference surely reflects the importance placed by the White House on having some sort of peace progress to show in the wake of the Gulf war. "There were predictions months ago that we'd never be this far," President Bush said this week about the Middle East peace process. m much more optimistic now than I was a month ago." Now that the Israelis have conditionally agreed to attend the conference, the Palestinians are the only principal group not to have given a yes. And hints of trouble have developed in recent days on that score. On Aug. 6 Yasser Arafat, chairman of the Palestine Liberation Organization, repudiated earlier remarks by a PLO moderate and, in a New York Times interview, insisted that he must be allowed to pick the Palestinian delegation. Israel rejects the PLO as a terrorist organization and has said it won't go to a peace conference if Palestinian representatives include anyone from the PLO. The Israelis also say the Palestinians can't name anyone from East Jerusalem, because they fear that would call into question Israeli authority over all of Jerusalem. Arafat, in the Times interview, complained bitterly about these Israeli conditions. "Why are only the Palestinians treated in this way? Would Israel accept if I only wanted to deal with the Peace Now movement, not the Likud government?" (Peace Now is an Israeli peace movement). It is unlikely a peace conference will be held if Palestinians don't agree on a delegation acceptable to Israel. But many analysts in Washington feel the Palestinians will have to conform eventually to the Israeli demands. The PLO's position has been weakened by its support of Iraq in the Gulf crisis, and the fact that its former patron, Syria, has already agreed to attend the peace talks. Palestinians in the occupied territories know that the intifadah (uprising) has turned sour and is fraught with Arab -Arab violence. "I think that in the end the Palestinians will not be able to veto the proceedings," said Harvey Sicherman, a fellow at the Washington Institute for Near East Policy. But all the strain put into putting the peace conference together has tended to obscure the fact that just because people are sitting in a room together doesn't mean they have to agree on anything. White House officials have admitted that they haven't yet focused on the possibilities of the meeting itself, preferring to approach the peace p rocess one step at a time. If all parties show up at the talks and simply stick fast to their state positions, very little will be accomplished. Syrian leader Hafez Assad, for example, seems to have in mind a conference which simply insists Israel get out of the occupied territories and Golan Heights, with peace to follow after, said Martin Indyk, executive director of the institute. Such a hard-line position isn't likely to get any Israeli response. But interim progress might be possible on another subject: Lebanon, according to Mr. Indyk. Syria has become a key player in the politics and security of its Lebanese neighbor. The Israeli military still controls a security zone in south Lebanon, to prevent terrorist attacks into northern Israel. If Syria were to agree to police the security zone, it could create conditions for an Israeli withdrawal. Syria's Assad would then be able to portray himself as a man who had returned at least some territory to Arab control. "That is a much more viable negotiation in the short term than a territorial compromise in the Golan Heights," said Indyk. For the Palestinians of the occupied territories, peace conference negotiations on interim self-government might offer important advantages, according to Mr. Sicherman. One would be the end of Israeli military government, and with it, possibly, an end to the continued building of Jewish settlements in ther territories. Another would be the creation of Palestinian political institutions widely attractive to the international community.