WHEN Arabs and Israelis assemble in Madrid next week to launch a Middle East peace process, there will be far more doubters than optimists on hand.But while huge obstacles stand in the way of peace, the gathering, announced Friday in Jerusalem, could mark a historic turning point for a region burdened by decades of tension and bloodshed. If the peace process unfolds according to the vision of its tireless instigator, United States Secretary of State James Baker III, it could provide the most comprehensive framework ever for settling the Arab-Israeli dispute and other regional conflicts. For Israel in particular, direct talks with the likes of Syria and Jordan would be a watershed: the beginning of the end of four decades of diplomatic isolation in the Middle East. But doubt is beginning to outweigh hope even before Wednesday's opening ceremonies in Madrid. One concern is that, in his eagerness to translate military victory in the Gulf war into diplomatic gains, Mr. Baker has glossed over differences that will be impossible to reconcile once the hard bargaining begins. More troubling is the grudging attitude now increasingly evident in Damascus and Jerusalem, the two cities where the peace effort will succeed or fail. Confronted by Israel's repeated refusal to discuss relinquishing the Golan Heights, Syria appears convinced that there is little to gain from peace talks. Vexed by strained relations with Washington, Israel believes there is much to lose. Invitations to the Madrid meeting, to be hosted by President Bush and Soviet President Gorbachev, were issued on Friday. The parties have until Wednesday to respond. (Madrid pleases all parties, Page 6.) US officials say the goal of the peace process is to end four decades of hot and cold war between Israel and its Arab neighbors and to settle the status of the 1.5 million Palestinians who live in the Israeli-occupied West Bank and Gaza Strip. They acknowledge that huge obstacles stand in the way of both objectives. The conference announcement was preceded by the restoration of relations between Israel and the Soviet Union, which were broken off by Moscow in 1967. Under Baker's proposal the peace process would occur in three stages. Four days after the ceremonial opening in Madrid (Phase 1), bilateral talks between Israel and Syria, Lebanon, and a joint Jordanian-Palestinian delegation (Phase 2) would begin. Phase 3 of the process, starting two weeks after Madrid, would be open to the remaining Arab states and focus on regional issues like arms buildups and water shortages. Eight trips to the region by Baker have failed to fully resolve the contentious issue of Pa lestinian representation at the peace talks. The Palestinians were expected to bow to Israel's demands by announcing a list of negotiators purged of Palestine Liberation Organization members and all but actual residents of the West Bank and Gaza. But Israel is protesting the PLO's plans to play an indirect roll in the peace process through a committee that will be designated to advise the Palestinian delegation. The Madrid meeting will be the the first try at a comprehensive peace since representatives of several Middle Eastern states gathered for a brief, unsuccessful conference in Geneva after the 1973 Arab-Israeli war. Israel and Egypt made a separate peace at Camp David five years later, but since then the region has endured two more wars and a prolonged uprising by residents of the occupied territories. Israel's objective in the talks will be to secure formal peace treaties with other Arab states. The main Arab parties have specific territorial goals including the West Bank, Gaza, and the Golan Heights. In bilateral talks, Israel and a joint delegation of Jordanians and Palestinians will also seek to agree on the terms of a five-year period of limited self-government for Palestinians living in the occupied territories. Talks on the final status of the territories are scheduled to begin during the third year of self-rule. The road to Madrid was paved by two developments - the end of the cold war and the victory of US-led forces in the Gulf war - that have helped convince even hard-line Arab regimes that force is no longer an option in dealing with Israel. "On the whole there is now a strong recognition among relevant Arab parties ... that the conflict simply has to be settled through peaceful means," William Quandt, a Middle East expert at the Brookings Institution, said recently. But the main catalyst has been Baker himself, who defined the tenuous middle ground between Israel's insistence on bilateral negotiations and Arab demands for an all-parties peace conference under UN auspices. As Baker acknowledged Friday, the process begun at Madrid will face "problems ... hitches, and probably, many interruptions along the way." Not least of these problems is the central Catch-22 of the peace process - namely, the basic disagreement over whether territorial concessions by Israel or recognition of Israel by the Arab states should come first. Even if the Arabs prove flexible on the point, militant nationalists in Israel's Likud government have pledged to block any attempt to relinquish occupied lands. The Bush administration is hoping that the mere process of talking will chip away at mutual suspicions that have thwarted compromise in the past. Whatever the outcome of the peace talks, the run-up to Madrid has produced significant changes in US policy, Middle East analysts say. Determined to clear away obstacles to a peace settlement, the Bush administration has put muscle into its longstanding opposition to the expansion of Jewish settlements in the West Bank. Meanwhile, the administration has now concluded that peace is impossible without Syria, even as President Assad has concluded that cooperating with the US offers the only realistic chance of regaining the Golan Heights.