DIPLOMACY : Stalemate Over Caucasus Region Strands Many : Seventeen months into a cease-fire in the enclave of Nagorno-Karabakh, refugees are still waiting for a solution that few see as imminent.

ZAGULBA, Azerbaijan — People throughout the Caucasus Mountains of the former Soviet Union are proud of their hospitality toward anyone not trying to slaughter them. Their generosity can be as overwhelming--even as aggressive--as their ethnic blood feuds.

This is one reason why the longest of Caucasus feuds, the 7 1/2-year conflict over Nagorno-Karabakh, has been so painful for Bilal Abbasov. He not only was driven from his native village, but he wound up in a refugee shelter not suitable for entertaining guests.

“I would invite you in, but I am afraid you would not find a place to sit,” he apologized to a visitor here on the pine-shaded lawn of what was once a Soviet health resort. “There are nine of us living in one tiny room. We eat and sleep in shifts. We have existed like this for three years now.”

Abbasov, 65, a wiry peasant with ragged coat and bent walking stick, is one of 692,000 Azerbaijanis driven from their villages by Armenian troops who occupy 20% of this country’s territory. Seventeen months into a cease-fire that halted the bloodshed, they still cannot go home.

Their plight is the harshest consequence of a no-peace, no-war stalemate that prevents three presidents--Heydar A. Aliyev of Azerbaijan, Levon A. Ter-Petrosyan of Armenia and Robert Kocharian of Nagorno-Karabakh--from concluding a peace treaty.

“All parties understand what the final settlement is going to look like, but they are fighting like hell over the details,” said a Western diplomat who is trying to forge a settlement. “They realize, intellectually, that putting off a solution is not in their interests. But no one is willing to hold his nose and take the first step.”

That’s understandable after a war that left at least 15,000 dead. Pro-independence forces from Nagorno-Karabakh, a mountainous enclave of Azerbaijan dominated by ethnic Armenians, drove the Azerbaijani army off its land with Armenian military help, then went on a rout of adjacent Azerbaijani villages to surround the enclave with a security zone.

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Peace talks in various European cities have produced an understanding that Nagorno-Karabakh will be granted full autonomy in exchange for return of surrounding Azerbaijani lands. All sides also accept the idea of an internationally supervised supply corridor between the enclave and Armenia proper.

But Aliyev demands the Azerbaijani lands back before he will even discuss anything else, while Kocharian’s commanders argue that no army has ever yielded captured territory prior to an overall treaty.

Armenia has suggested that Aliyev, as a first step, lift an energy and trade blockade of Armenia. But the Azerbaijanis cannot restore damaged gas lines and railroads on land occupied by Armenians, and it is questionable whether Aliyev’s weak government could stop saboteurs from blowing them up again.

Burdened by so many displaced villagers, Azerbaijan is the loser in this stalemate. Aliyev sends Western visitors on helicopter tours over squalid tent cities and complains privately that his oil concessions to American companies have not brought more pressure on Armenia, which has a powerful diaspora lobby in Washington, to settle up.

Azerbaijan’s vast Caspian Sea oil deposits, due to start flowing next year, might help break the deadlock. American and Azerbaijani officials say they could offer Armenia the incentive of a “peace pipeline” to carry oil through its territory, en route to Western markets--and bring lucrative transit fees to Armenia’s treasury.

Meanwhile, three dozen foreign relief agencies helping Azerbaijan cope with its humanitarian disaster are digging in for a long stay.

“We do not speculate on possibilities for peace,” said Stane Salobir, the program officer in Azerbaijan for the Office of the U.N. High Commissioner for Refugees. “We’re just trying to give people better places to live, better ways to sustain themselves while they wait.”