ALGIERS, Algeria--Members of the Palestine National Council worked out final details yesterday of a new political strategy that would renounce terrorism and implicitly recognize Israel.

The council also is expected to declare Palestinian independence in the West Bank and Gaza Strip, which Israel captured from Jordan and Egypt in the 1967 Middle East war and has occupied since.

With the new approach, the 450-member council hopes to meet at least some conditions the United States has set for dealing with the Palestinian Liberation Organization (PLO). The Arab League formed the council in 1964, but it has assumed the role of a PLO legislature.

Behind the scenes of the council sessions, which began a special session Saturday, PLO chief Yasser Arafat rallied members to his new policy.

Arafat beamed and said, "Everything is fine" as he entered the Palais des Nations conference center yesterday for a meeting of the committee drafting resolutions.

George Habash, leader of the radical Popular Front for the Liberation of Palestine, contended that too many concessions were being offered with no guaranteed response from the United States and Israel.

In an unusual display of moderation, however, he assured Arafat he would "express reservations in public, but bow to the rule of the majority," conference sources said.

In Washington, President Reagan said implicit PLO recognition of Israel "would be some progress," but added: "There are other problems that remain to be solved."

Israel rejected results of the Algiers meeting in advance.

"We will not negotiate with the PLO," said Prime Minister Yitzhak Shamir. "It's not a problem of definition and formulations of various positions. We'll not negotiate with them because they're opposed to peace with Israel."

Arafat and other PLO leaders consider the independence declaration a historic step toward creation of an independent state in the West Bank and Gaza. The council meeting is called the "Intefadeh" session after the 11-month-old uprising among the 1.5 million Palestinians of the occupied lands.

Another resolution on the docket would empower the PLO's 15-man Executive Committee and the Central Council, a 70-member senate-like body in the Palestine National Council, to form a provisional government later.

Palestinian officials say that such a government in the territories would not replace the PLO, which Arab summits have declared the sole legitimate representative of the Palestinians, but would act as one of its institutions.

They said the new government would have a mandate to negotiate for Palestinians in the framework of an international conference on Middle East peace under U.N. auspices.

A central aim of the new strategy is to improve the PLO's image in the West and convert sympathy for the Palestinian rebellion into political gain.

Early drafts of the points on terrorism and U.N. Security Council Resolution 242, show a marked swing toward moderation.

Drafts obtained by The Associated Press included endorsement of Resolutions 242 and 338 as "the basis for an international conference, while stressing the necessity to guarantee Palestinian national and political rights, foremost of which is the right to self-determination."

Resolution 242, adopted after the 1967 war, implicitly recognizes Israel by referring to the right of all states in the region to live in peace within secure and recognized borders. It also calls for Israeli withdrawal from occupied lands.

Until now the PLO has rejected the resolution as the basis for peace, arguing that it treats the Palestinians only as a refugee problem and ignores their quest for self-determination and a homeland.

Resolution 338, which the Security Council adopted in 1973, calls for implementation of 242.

The United States has demanded that the PLO endorse 242, explicitly recognize Israel and renounce terrorism before allowing it any role in the Middle East peace process.