President Bush on Monday denounced Iraqi President Saddam Hussein as an international outcast who plundered Kuwait. But Bush also offered Baghdad hope that relinquishing its grip on its Persian Gulf neighbor could spur negotiations on the Arab-Israeli conflict.

The president's speech to the U.N. General Assembly blended condemnation of Saddam with an overture for a resolution of the two-month crisis. "We seek a peaceful outcome, a diplomatic outcome," Bush said.Significantly, he offered the Iraqi leader the prospect of "new arrangements" among the states in the gulf region as well as a chance for a settlement between the Arabs and Israel - provided Iraq leaves Kuwait unconditionally.

"Iraq's unprovoked aggression is a throwback to another era, a dark relic from a dark time," Bush said. "It has plundered Kuwait, terrorized innocent civilians and held even diplomats hostage."

The president, lining up with a proposal first advanced last week by Soviet Foreign Minister Eduard Shevardnadze, said Iraq and its leadership must be held liable "for these crimes of abuse and destruction."

But, at the same time, Bush edged perceptibly closer to Saddam's demand that his territorial dispute with Kuwait be linked to the Arabs' grievance with Israel for holding on to territory Syria and Jordan lost in the 1967 Mideast war.

Saddam seeks French `debate'

A similar gesture last week by President Francois Mitterrand of France drew a mixed response Sunday from Saddam, who suggested that Iraq would fight to defend its seizure of Kuwait but also offered to open a `debate" with France on the region's future.

"We intend to make contacts with the French government to explain after inquiry, questioning and dialogue our views accurately so that everything is based on clear ideas and actions," the Iraqi leader said in a broadcast message Sunday - the anniversary of the birth of the prophet Mohammed.

Mitterrand, in a four-step proposal, called first for Iraq's withdrawal from Kuwait, which it invaded on Aug. 2. The pullout would be supervised by international observers as the emirate's sovereignty was restored.

Then, negotiators would deal with the division of Lebanon and the Arab-Israel conflict. In the fourth stage, armaments in the Middle East and the Persian Gulf would be scaled down.

It's Iraq against the world

Bush reiterated that Iraq's annexation of Kuwait will not be permitted to stand, and that Saddam has placed his country against the world.

However, the president said, "In the aftermath of Iraq's unconditional departure from Kuwait, I truly believe that there may be opportunities:

- For Iraq and Kuwait to settle their differences permanently;

- For the states of the gulf themselves to build new arrangements for stability;

- And for all states and peoples of the region to settle the conflict that divides the Arabs from Israel.

"And yet," Bush said, "the world's key task - now, first and always - must be to demonstrate that aggression will not be tolerated or rewarded."

Seeming shift in U.S. policy

The speech seemed to reflect a U.S. policy shift. Throughout the gulf crisis, U.S. officials insisted that Iraq's seizure of Kuwait could not be linked in any way to the Arab-Israeli dispute or other regional problems.

The United States has long been committed to a Mideast settlement in which Israel would exchange territory for Arab recognition of its right to exist. Bush made no reference on how the talks would be held; the Soviets and the Arabs demand a Mideast peace conference, but the Israeli government objects.

Bush assured Saddam that "we seek no advantages for ourselves" in the gulf.

Nor, he said, "do we seek to maintain our military forces in Saudi Arabia for one day longer than is necessary."

Saudis requested U.S. troops

Bush said the 165,000 U.S. troops defending the oilfields of Saudi Arabia were sent there at the request of the Saudi government.

"The American people - and this president - want every single American soldier brought home as soon as the mission is accomplished," he said.

Bush praised the Soviet Union for collaborating with the United States in a worldwide cutoff of trade with Iraq. The superpowers "had indeed put four decades of history behind us," he said.

More than ever before, Bush said, the United Nations is now "a center for international collective security."

Thatcher presses for reparations

Britain Prime Minister Margaret Thatcher suggested Sunday that the world community might seek reparations from Iraq once the crisis ends, according to a British source who insisted on anonymity. The source said Thatcher broached the idea to Japanese Prime Minister Toshiki Kaifu at a meeting in New York.

In other developments:

- New reports emerged of atrocities by Iraqi occupation forces. A Kuwaiti businessman, speaking by telephone, said Saturday that he saw Iraqi soldiers summarily execute eight men accused of resistance activities in occupied Kuwait. He said the executions occurred Sept. 21.

- Two U.S. Air Force pilots were killed Sunday when their F-15 fighter plane crashed during an exercise in Saudi Arabia, the U.S. military command said. Previously, three other U.S. servicemen had been killed in accidents in Saudi Arabia during operation Desert Shield.

- China dismissed as "totally groundless" a report Sunday by the British newspaper Independent that China violated U.N. sanctions by agreeing to sell Iraq a chemical used to make nuclear weapons, missile fuel and nerve gas.

- Jordan threatened to restrict the flow of foreigners fleeing Iraq into Jordan unless it gets more international aid. More than 600,000 people poured in after the invasion, officials said.