225 HOSTAGES FREED IN PERU : 7 AMERICANS AMONG RELEASED.

Byline: Clifford Krauss The New York Times

Marxist guerrillas occupying the residence of the Japanese ambassador released about 225 of their 350 hostages Sunday night but they stopped short of fulfilling President Alberto Fujimori's demand that they release all their captives and lay down their arms in exchange for the chance of free passage out of the compound.

The guerrillas did not release many of their most strategically important captives, including ambassadors of several Latin American countries, five Peruvian generals, two Peruvian Cabinet members and scores of Japanese and Peruvian business executives.

While the move appeared conciliatory, it also eased the way for the 20 guerrillas to control and provide for the estimated 125 hostages remaining.

Surrounded by heavily armed Peruvian police SWAT teams and an armored car, five buses equipped with stretchers transported the captives away from the compound to a police hospital, where they were to undergo medical examinations. The development followed a day of negotiations between a representative of the Red Cross and the Peruvian education minister.

The darkness of night prevented identification of most of the hostages freed, but the group included the Cuban ambassador, Pedro Diaz Arcia, and all of the six middle-ranking U.S. government officials who were held. Among the Americans were James Wagner, a political officer, John Riddle, an economic officer, and John Crowe, a senior narcotics agent.

``We're not doing this because we think President Fujimori is governing for the poor,'' said a statement released by the rebels moments before the release, ``but because we respect the Peruvian people.'' The statement said the release, which began just before 10 p.m., was ``a gesture of ours for Christmas.''

It was by far the largest discharge of hostages since the rebels of the Tupac Amaru Revolutionary Movement staged their daring raid on a diplomatic party given by the Japanese ambassador Tuesday and took more than 600 people captive.

The breakthrough stopped far short of an end to the crisis, but it came as a surprise and was broadcast live on Peruvian television. It occurred only hours after Japan's foreign minister, Yukihiko Ikeda, returned to Tokyo after his two-day effort to free the hostages had apparently failed. Other mediation efforts by several freed ambassadors - including those of Greece, Germany, Canada and Egypt - had collapsed during the week.

As the hostages entered the buses, Education Minister Domingo Palermo, the government mediator who negotiated the release with Michel Minnig, a Red Cross representative, shook their hands. A number of Japanese looked on, hoping their relatives would be released. As the first bus drove away, smiling former hostages waved to reporters and residents of the fashionable San Isidro neighborhood.

When the hostages arrived at the hospital, they were greeted by Fujimori.

An opening may have come when the president made a nationally televised address late Saturday night, breaking the silence he had kept for five days. Fujimori, who kept his strategy to himself and perhaps a few advisers, alternated in his speech between offering an olive branch and sharply condemning terrorism.

``One can't speak of peace nor of an accord while terror is utilized as the principal argument,'' he said. ``However, my government will not abandon its responsibility to seek a humanitarian exit.''

His highly conditioned overture for a negotiated solution amounted to this: The government will consider allowing the rebels to leave the compound safely only if they free every one of their captives and drop their arms. He did not directly address the principal rebel demands that the government free some 300 rebel comrades held in prison and grant passage to a safe haven deep in the Peruvian Andes.

Fujimori's offer came in response to a public relations initiative by the rebels on Saturday afternoon trying to demonstrate that they were treating their hostage diplomats, generals, cabinet officials and business executives humanely.

Apparently seeking to add to the pressure that Japan has put on Peru to seek a peaceful settlement, the rebels allowed the Japanese ambassador and the Peruvian foreign minister to use a televised shortwave radio broadcast to urge Fujimori to consider rebel demands to avoid bloodshed.

But as thousands of Peruvians marched in the streets earlier Sunday calling for a peaceful settlement - waving Peruvian flags, religious ornaments and even pet doves - the rebels and government appeared to be preparing for a long standoff. Even as the two sides tried to project flexibility, the rebels refused to compromise on their demands, and the government refused to restore electricity and telephone service to the compound.

``Each side is trying to see what the other will do next,'' a Western diplomat monitoring the crisis said hours before the release. ``I have the distinct impression that the terrorists thought through the takeover, but perhaps they didn't stop to think what to do next with hundreds of hostages.''

As for Fujimori's offer, he added, ``I didn't see a lot of options left open, and the use of force is still an option.''

What emerged during the past two days was something akin to a high-stakes game of chess between Fujimori and Nestor Cerpa Cartolini, the Tupac Amaru rebel commander, with each countering the other with moves that are purposefully ambiguous to keep the other guessing.

Fujimori has overwhelming firepower at his disposal, while the rebels still have in their hands a rich collection of dignitaries.

After years of defeat in the mountains, jungles and cities, Cerpa stunned the nation with the audacity of his attack Tuesday night. As one group of rebels infiltrated the party in honor of the Japanese emperor and served food as waiters, another band blasted their way into the compound with dynamite - all, miraculously, without a single fatality.

CAPTION(S):

2 Photos

PHOTO (1 -- color) Sylvana Molina hugs her father, Marcio Molina, after he and dozens of other hostages were released Sunday in Lima, Peru.

(2) A Red Cross worker puts his hand on the shoulder of an unidentified hostage freed Sunday in Lima, Peru.

Associated Press