ALGIERS, Algeria (AP) _ The Palestine National Council may meet soon to resolve internal conflicts over the U.S.-Soviet initiative for Middle East peace talks, Palestinian sources said Monday.

The members of the council, regarded as the Palestinians' parliament-in- exile, are divided over how to confront Israeli conditions on who would represent the Palestinians at the talks, which have tentatively been set for October.

The issue of representation is considered the key remaining obstacle to the talks. Hard-line Palestinians refuse any Israeli involvement in choosing who they will meet with. Moderates see room for compromise.

But all Palestinian groups appear to agree that one of their representatives must be from east Jerusalem, which Israel captured along with the West Bank and Gaza strip in the 1967 Middle East war.

This condition is rejected by Israel, which also flatly refuses any participation by the Palestine Liberation Organization.

Jerusalem's holiest shrines lie in east Jerusalem, claimed by both Israel and Palestinians as part of their capital.

PLO chairman Yasser Arafat and President Chadli Bendjedid of Algeria on Sunday discussed holding a Palestine National Council meeting in Algiers next month, the Palestinian sources said, speaking on condition of anonymity.

Arafat said Sunday that if Israel insists that the PLO and Palestinians from east Jerusalem play no role in the conference, ''The Palestinian revolution will continue, wave after wave, until the Palestinian flag waves above the walls, the minarets, and the churches of the holy city of Jerusalem.''

Arafat's hard-line statement came in an Arabic language interview with Algerian radio. Arafat aide Bassam Abu Sharif, speaking to reporters traveling with U.S. Secretary of State James A. Baker III on Sunday, had indicated the PLO would accept the conditions. It was difficult to know which comments represented the official position of the PLO.

A Palestinian uprising against Israeli occupation of territories seized in the 1967 Arab-Israeli war has gone on for 44 months.

Among those opposing the conference are the Popular Front for the Liberation of Palestine, the second-largest PLO faction, and the Democratic Front for the Liberation of Palestine, the third-largest faction. A PFLP spokesman said in Damascus last week taking part in the conference would amount to ''no more than a bridge for direct negotiations.''

The Popular Front for the Liberation of Palestine-General Command, a group outside the PLO, dismissed the conference as manipulated by the U.S.-Israeli alliance.

Middle East watcher Charles Snow wrote in the journal Middle East Economic Survey, published Monday, that the PLO ''appears to have tacitly accepted that it will be indirectly represented in a joint delegation by residents of the occupied territories.

''But the Palestinians have to all appearances drawn a red line around Jerusalem and are as adamant that a resident of east Jerusalem must be included in their delegation as the Israelis are that he or she must not,'' Snow wrote.

''This is the circle Mr. Baker must try to square.''