Israel on Tuesday told the United States it was ready to hold peace talks with the Arabs under American auspices and with the Soviet Union participating in a regional conference.

Secretary of State James A. Baker III responded positively to the initiative presented to him by Foreign Minister David Levy. And yet, Baker said he wanted to talk to Arab leaders before committing the U.S. government to the proposition.If the Arabs agree to the Israeli initiative, Baker's Mideast diplomacy could achieve a significant breakthrough, even though the outcome of negotiations would be uncertain.

"We have had a productive and very constructive meeting," Baker said after the hourlong session with Levy at the foreign ministry.

Baker then met for 21/2 hours with Prime Minister Yitzhak Shamir, who had set a positive tone for Baker's stop in Israel by announcing some 1,000 Palestinian prisoners would be released this weekend.

They said nothing afterward. But Avi Pazner, the prime minister's press counselor, said the two would meet again, either later Tuesday or Wednesday before Baker goes to Cairo.

Baker then sat down with a delegation of six Palestinian leaders, all of them supporters of the Fatah faction of the Palestine Liberation Organization.

Baker will meet with Egyptian, Saudi, Syrian and Jordanian officials this week, and Israeli sources said he may return to Jerusalem before going home to report to President Bush.

Israel has objected all along to an international peace conference on the grounds the Soviet Union was likely to side with the Arabs.

Levy underscored that his government would agree to a regional conference with Soviet participation only if it produces direct negotiations with the Arab governments. He made no mention of the Palestinians, except to reaffirm a 1989 Shamir plan to hold elections on the West Bank and in Gaza leading to limited self-rule.

The Shamir government hopes that before such talks could be held, Moscow would restore full diplomatic relations with Israel.

The Arabs, with support from Bush, are demanding Israel give up territory in exchange for peace. Shamir, however, insists on holding onto the West Bank and Gaza, which Israel took in 1967.