THE brief opening round of the Middle East peace conference in Madrid was Secretary of State James Baker's masterpiece. So impressive, after years of frustration, that even hardened specialists grew misty-eyed. "The fact that the parties to the conflict are meeting in one room," wrote one, "changes the agenda in the Middle East." Alas, don't believe it. The parties' agendas are unchanged. There is, however, one portentous difference - in the status of the Palestinian delegation.The Palestinian envoys are doing what no Palestinian leaders have done before. They are not demanding all or nothing, as their predecessors did for 70 years - getting nothing. These players are starting with the concept of a homeland, as the Jews did in 1917, and negotiating autonomy to remove the humiliating, oppressive weight of occupation. In Madrid, they were reasonable and reassuring; not unshaven freedom fighters but middle-class professionals. As their chairman, Dr. Haidar Abd al-Shavei, addressed the meeting with quiet eloquence, Israel's Prime Minister Yitzhak Shamir passed a note to a colleague. Jokesters cracked that it read, "We should have asked for the PLO." Manner and tactics are by no means unimportant, but the transformation in the Palestinian group goes deeper. It reflects a changed mood among the people of the West Bank and Gaza. The intifadah uprising, ending its fourth year, has cost Palestinians dearly. Some 850 men, women, and children have been killed by the Israelis. Half again as many have been assassinated by Palestinian vigilantes as "collaborators." Thousands have been injured, tens of thousands arrested. Hundreds of homes have been demolishe d. Unemployment is high. The entrenched Palestinian leadership, devoid of new ideas, keeps calling protest strikes that hurt only the Palestinians. The people have had enough. When Hamas, the Islamic extremist group, called a general strike, complete with "holy blood in the streets of our country," for Oct. 30, the opening day of the Madrid meeting, it was largely ignored. Counter-demonstrators in Gaza waved olive branches instead. For months, violence has ebbed. All schools and all but one university have been reopened on the tacit understanding between parents and Israeli authorities that there be no incidents. Arab newspapers have begun criticizing the internal leaders and the Palestine Liberation Organization, even pointing the finger at Yasser Arafat, whose prestige sank drastically after fraternizing with Saddam Hussein of Iraq. The change in mood is not surrender to the Israeli occupation. It marks the search for a better way to end it. For this the people are turning to new leaders who pay lip service to the PLO as the symbol of Palestinian identity but are finding their own way. For the past 14 years, Israel's Likud government has suppressed every stirring of political independence. This time, it has run into American determination that a legitimate Palestinian voice be heard in the negotiation of peace. THE Madrid delegation from the occupied territories had Secretary Baker's approval. It sat at the table with the president of the United States. Washington's official dialogue with the PLO in Tunis, broken off in 1990, has quietly been transferred to the new leaders. When the delegation came home, US consular officials watched how the occupation authorities met it. When the Israeli police proposed prosecuting Hanan Ashrawi, the delegation's spokeswoman, for allegedly visiting Arafat, President Bush said he was watching the matter closely. These Palestinians have international status. Unfortunately, they face the danger of assassination by Arab radicals or Israeli fanatics, and efforts at character assassination at least may be expected. The hare-brained proposal to prosecute Mrs. Ashrawi reflects a certain panic. On the Arab side, within a week of Madrid, Arafat was invited to Damascus. President Hafez al-Assad of Syria had him thrown out in 1983. Now, both are worried that the Palestinian delegation has on its own agreed to join the regional talks, the third phase of the peace conference. The emergence of an accepted Palestinian negotiating partner robs the Israeli right wing of its excuse that there is no one to talk to. On the other hand, the Israeli doves who took a beating during the Palestinians' binge with Saddam will be encouraged. So will Foreign Minister David Levy, who has broken with Shamir's hard line. What is needed in the Middle East is a Levantine solution pursued along a corkscrew path of mutual need. The emergence of a new Palestinian presence makes that hope at least seem possible.