AMMAN, Jordan (AP) _ King Hussein and PLO Chairman Yasser Arafat are holding their most important talks in a year, discussing a new formula that might overcome some U.S. objections to dealing with the PLO, a Palestinian source said Monday.

The highly placed source said the formula would build on the year-old Hussein-Arafat agreement to offer peace to Israel and create a Palestinian state confederated with Jordan. He made his remarks on condition of anonymity in a briefing with four reporters.

Arafat met Jordanian Prime Minister Zaid Rifai on Monday to follow up two meetings the previous day with Hussein, and the source said the ''decisive'' PLO-Jordanian meetings would continue until Saturday.

Egyptian President Hosni Mubarak said last month that the Palestine Liberation Organization risked being shut out of the peace process if it did not accept U.N. Security Council Resolution 242, which calls for peace guarantees in return for Israeli withdrawal from land captured in the 1967 Mideast war.

Mubarak, who has cooperated with Hussein in his peace drive, said the deadline for acceptance was Jan. 27.

Hussein also sought support for peace moves from Syria, a bitter foe of Arafat, but little indication has emerged that Syria would go along.

The United States, a major figure in any proposed peace conference, refuses to deal with the PLO until it endorses 242 and explicitly accepts Israel's right to exist. The PLO rejects 242 because it does not mention Palestinian rights to a state.

The PLO source said the discussions involved a formula that would incorporate 242 while insisting on Palestinian rights to self-determination.

He said the PLO would not accept 242 itself until the United States recognized a Palestinian right to self-determination within a Jordanian- Palestin ian confederation. The Hussein-Arafat pact already echoes the ''land-for- peace'' aspect of Resolution 242, and PLO officials have repeatedly said they accept 242 as part of a package with other U.N. measures that mention Palestinian rights.

The United States opposes a full Palestinian state and supports self- government in association with Jordan.

The source said the Hussein-Arafat talks here were their most important since their Feb. 11 agreement. But he insisted the new formula would not reject or amend that pact.

The agreement has been frustrated in part by disputes over who should represent Palestinians and over the form of an international conference for peace talks.

Both Israel and Jordan are operating under time pressure. Under a coalition government agreement, Israeli Prime Minister Shimon Peres is due to swap jobs in October with Foreign Minister Yitzhak Shamir, who opposes territorial concessions to the Arabs.

A $1.9-billion arms deal long sought by Hussein is blocked in the U.S. Congress until Hussein negotiates directly with Israel.

U.S. Assistant Secretary of State Richard Murphy met saparately in London last week with Hussein and Peres in an effort to reduce differences.

Murphy's assistant, Roscoe Suddarth, and U.S. Mideast peace envoy Wat Cluverius met with Jordanian officials on Sunday. Both left Amman on Monday.