DHARAN, Saudi Arabia--Iraq today offered for the first time to comply with U.N. demands that it relinquish Kuwait, raising hopes for an end to the Persian Gulf war. But President Bush said conditions attached to the offer made it nothing more than a "cruel hoax."

"There is nothing new here," Bush said of the Iraqi offer. He called on the Iraqi military and people to rise up against Saddam Hussein.

In making the offer, the Baghdad government said any withdrawal of its forces "must" be linked to a pullout of Allied forces from the region-and "should" be tied to an Israeli withdrawal from the occupied lands.

It was not clear, from Iraq's use of the word "should" with regard to an Israeli withdrawal, whether Baghdad was dropping its insistance on such a linkage to an Israeli pullout from occupied Arab lands.

Throughout the months of the Gulf crisis, the United States steadfastly rejected any such linkage.

The world's attention has been riveted by the standoff in the Persian Gulf since Iraq seized its small, oil-rich neighbor 6 months ago, setting the stage for a confrontation with the might of an allied coalition led by the United States.

Today's Iraqi announcement drew cautious initial reactions from world governments, but sent rapid shock waves through world financial markets, which have ridden a roller coaster throughout the crisis.

A Pentagon source said air combat missions were underway today and would continue "until we receive orders to the contrary" from President Bush.

The tens of thousands of American troops employed in the Saudi desert and on ships in the Persian Gulf waited anxiously for more details.

In Baghdad, hammered by a month of allied bombing, some residents fired guns into the air in celebration after hearing of the possible settlement.

In one poor neighborhood where a dozen shops had been wrecked by allied bombs, smiling residents gathered spontaneously in the street. "The war is over," said one.

The surprise Iraqi announcements came in a communique from Iraq's ruling Revolutionary Command Council, which is headed by Iraqi President Saddam Hussein. The communique came after what Iraqi media had earlier said was an overnight session of the country's ruling five-man council.

The communique said: "The first step required from Iraq-that is the withdrawal--must be coupled with the withdrawal from the Middle East and the Arabian Gulf" of the allied forces that rushed to the region after the invasion of Kuwait.

"These withdrawals are to be completed within one month of the comprehensive ceasefire," it added.

It also said the Iraqi withdrawal "should be linked to an Israeli pullout from occupied Palestine and other Arab territories.