The greatest uncertainty hanging over the economy and the financial markets is whether the confrontation in the Persian Gulf will end in war or peace.

Markets got a shot in the arm this week from the news that President Saddam Hussein of Iraq had accepted President Bush's proposal for discussions in Washington and Baghdad with their respective chief foreign ministers, aimed at a diplomatic resolution of the conflict.And on Thursday word came that Saddam would allow all foreign hostages to leave Iraq and Kuwait.

However, the end game of this affair is tricky - and could take a lot longer than the Jan. 15 deadline set by the United Nations resolutions calling for full Iraqi withdrawal from Kuwait, restoration of the Kuwaiti government and release of all hostages. Saddam will doubtless seek to escape from some of those terms.

President Bush said he was not convinced that Saddam had yet got the message from the United Nations resolutions that "all means" would be used against him if he did not get out.

Secretary of State James A. Baker said that as a "reward" for full Iraqi withdrawal and release of all hostages, the United States was prepared to offer assurances that it would not take military action.

Does all this mean that peace is about to break out? Not necessarily.

A high-ranking Western diplomat, just back from discussions in Iraq, said in a not-for-attribution interview this week that he still thought the resolution of the crisis would be by war.

He said Saddam, in his talks with Baker in Baghdad, might agree to full withdrawal from Kuwait and release of all the hostages - but that he would delay and delay, offering one pretext after another, while holding on to parts of Kuwait and to some hostages.

In the end, he said, war would come.

Similarly, Robert D. Hormats, a former State Department official, said this week that "the probability of war is increasing" because "Saddam Hussein thinks President Bush does not have the support of the United States people on a commitment to war."

Saddam's belief in American irresolution could force the United States into war.

What Hormats fears most is the so-called 80 percent solution, with Saddam giving up 80 percent of Kuwait and keeping the other 20 percent - including oilfields, two islands, and "the knowledge that he had stood the United States down."

Such a "solution," Hormats said, "could be worse than war," since it would cause the coalition to fragment and would leave Iraq in a position to earn enormous profits from oil, which it would use to buy advanced military technology, dominate the gulf and become a far more dangerous enemy.

With Hussein's instructions to his parliament to release all hostages, the 80 percent solution looks even more probable as his basic ploy.

If war comes, will it be quick or protracted?

Brian J. Fabbri, chief economist of the Midland Bank in New York, said the Bush administration was counting on a quick solution that would bring oil prices back to pre-crisis levels, raise consumer confidence and stimulate economic recovery.

Fabbri considers this a falsely optimistic view and contends that "the massive financial problems of the economy must be worked out before a meaningful expansion can emerge."

Most oil experts believe, as Charles L. Schultze of the Brookings Institution said this week, that if war broke out and ended quickly it would temporarily raise oil prices sharply and depress financial markets, but "sustained disruptions to oil supplies would not occur."

Oil prices would then fall back below current levels, and financial markets would soon recover, Schultze said.

But two "low probability" outcomes, he added, might confound the experts and disrupt this rather optimistic assessment: first, a long-lasting, high-intensity war and, second, the infliction by the Iraqis of substantial and continuing damage to oil production and transportation operations in the gulf.

The approaching talks between Iraq and the United States may well give a lift to spirits - and to markets - in coming weeks. However, a true resolution of the conflict with Iraq may remain out of reach. The tougher the U.S. stance, the greater the hope of a lasting settlement. But the chances of miscalculation are great.

At this point, as Professor M.A. Adelman of the Massachusetts Institute of Technology observes, it is hard to envision a "happy ending," for if Saddam goes before his people as a "discredited CEO with two big, failed investments, Iran and Kuwait," he himself may be liquidated.

But if he escapes with some gains, he will live to make even bigger trouble another day.