Israel Formally Rejects U.S. Plan for Palestinian Talks : Mideast: The response seems to doom Baker’s yearlong effort to get peace negotiations moving.

Prime Minister Yitzhak Shamir on Thursday formally rejected Washington’s proposals to open peace talks with a broad Palestinian panel that would include Arabs expelled from Israel as well as residents of East Jerusalem.

The response appears to sink more than a year’s effort by Secretary of State James A. Baker III to get peace talks off the ground. Shamir sent his reply in a letter to President Bush, who had pressed the Israeli leader for an answer to Baker’s invitation for preliminary peace talks in Cairo.

According to government radio, Shamir told Bush: “As you know, Mr. President, we are opposed to the participation of deportees in the Palestinian delegation and also the participation of East Jerusalem Arabs.”

The inclusion of exiled Palestinians was meant by Baker to give an off-stage role to the Palestine Liberation Organization, which had agreed to the formula. During the last 31 months, Israel has expelled several Palestinians for deep involvement in the continuing Arab uprising.

Several prominent political leaders of the revolt maintain homes in East Jerusalem, which Israel considers part of its sovereign territory.

In Washington, Baker was guarded in his remarks on the letter. When asked if the participation of exiled Palestinians and Jerusalem Arabs was vital to peace progress, he answered: “Suggestions that we have made, we made because we thought they were important in terms of achieving progress. That should not be taken as an unqualified yes answer to your question.”

Otherwise, he asked for time to study the note. “If the letter was absolutely definitive, we wouldn’t have to study it. It requires careful study and careful consideration and that’s what it’s getting,” he said.

“It is not a simple issue black and white. There are elements that are on both sides of the equation.”

The proposal to allow participation by exiled Palestinians and Arab residents of Jerusalem has been a stumbling block since June of last year when efforts to jump-start Israeli-Palestinian talks began in earnest. The talks were supposed to focus on Shamir’s proposal to hold elections in the rebellious West Bank and Gaza Strip, which are under Israel’s occupation.

In March, a unity government of Shamir’s Likud and the more dovish Labor Party collapsed over Shamir’s reluctance to say yes to Baker.

Some Israeli observers expressed surprise that Shamir appeared to come up with nothing new in his letter.

“The prime minister’s letter to President Bush is six pages--six pages!” said a radio commentator, “And there is not one new idea.”

A government spokesman characterized the letter, which was written Wednesday, as “friendly” and one that “would permit the dialogue between the United States and Israel to continue.”

In his letter to Bush, Shamir also reaffirmed his government’s commitment to expanding Israeli settlement of the West Bank and Gaza, home to 1.7 million Palestinians, Israeli officials said. Although Israel will continue to settle the land, it will not direct Soviet immigrants to live there.

He also made it clear that Israel will focus attention on persuading local Palestinian leaders to take up Israel’s offer of limited self-rule and will not talk with the PLO. Israel views the PLO as a terrorist threat and rejects its demand for a state in Gaza and the West Bank.

The Israeli leader also suggested that peace efforts focus more broadly on the Israeli problems with surrounding Arab states rather than concentrate on the Israeli-Palestinian conflict.

Shamir’s backing for Israeli colonization of the occupied land is likely to spur controversy in Washington. On Wednesday, Rep. David R. Obey (D-Wis.), chairman of the House Appropriations Committee’s subcommittee on foreign operations, warned that the United States might cut funds if Israel persisted in expanding settlements. More than 80,000 Israelis live in the Israeli-held land.

“The U.S. government has no obligation to fund, either directly or indirectly, settlements which we believe to be an impediment to the peace process,” Obey said.

It is unusual for anyone in Congress, which customarily votes overwhelmingly in favor of aid to Israel, to criticize Israel’s settlement policy. The House is considering a $3-billion military and economic aid package. Israel is by far the largest recipient of American assistance.

Yosef Ben-Aharon, a top aide to Shamir, avoided commenting directly on Obey’s remarks.

“I don’t want to answer any questions on settlements because it would only inflate their importance. We hope that the issue will be removed from the agenda of U.S.-Israeli relations,” he said.

Times staff writer Norman Kempster, in Washington, contributed to this report.