PALACE OF DESIRE by Naguib Mahfouz (Doubleday: $22.95; 422 pp.). This second volume of "The Cairo Trilogy" continues the saga of Al-Sayid Ahmad, an old-fashioned Egyptian patriarch. Both his dominance over his family and the certainty of his beliefs are called into question as his children grow to adulthood and he himself advances into late middle age. With one son dead, one divorced and one an idealistic dreamer, the father is forced to confront the diminishment of his power over his children. This is a timeless tale of social expectations, restrictions, ideals, disappointments, forbidden desires, sexual repression, anger and acquiescence--in short, the gamut of human concerns, as experienced in privileged Egyptian society.