Israel to Boycott U.S.-Sponsored Talks on Economics and Refugees : Negotiations: The Israelis are protesting the inclusion of Palestinians from outside the West Bank and Gaza Strip.

WASHINGTON —  In another demonstration of friction between Israel and the Bush Administration, Prime Minister Yitzhak Shamir’s government said Wednesday that it will boycott U.S.-sponsored conferences on Middle East economic development and refugee problems next week because Palestinians outside the West Bank and Gaza Strip will be allowed to take part.

“We have made our position clear that if Palestinian representatives from outside the territories . . . participate in these talks, then Israel will not be participating,” an Israeli diplomat in Washington said.

Israel wants to exclude Palestinians who live outside the occupied territories from the Middle East peace process to avoid even the suggestion that they would some day be allowed to return to either the West Bank or Gaza Strip.

Shamir’s government says it will talk peace with Palestinians living under Israeli occupation but considers all other Palestinians irrelevant to the negotiations.

By refusing to bend on the issue of Palestinian participation, however, Israel excluded itself from regional economic talks that were devised to make the complex U.S.-backed process more attractive to Israel. The meeting, scheduled for Brussels, would have brought Israel into contact with Japan, the European Community and oil-rich Persian Gulf states such as Saudi Arabia to discuss regional economic programs that Israel has long sought.

Israel also plans to miss talks in Ottawa on refugee problems.

Secretary of State James A. Baker III and Russian Foreign Minister Andrei V. Kozyrev, as conference co-sponsors, agreed to invite Palestinian exiles to the Brussels and Ottawa meetings because the subject matter could affect them. Palestinian participation in three other regional meetings--on arms control, water resources and the environment--will be limited to West Bank and Gaza residents. Israel will attend those meetings.

The Israeli diplomat said that Jerusalem proposed a compromise that would have allowed exiled Palestinians to participate in the meetings as members of the delegation from the country in which they were living. But the Arabs rejected that approach, and Baker backed them up.

When Israel first suggested the compromise last week, U.S. officials made it clear that Baker would not change his position on Palestinian participation. One senior official said pointedly, “We hope the Israelis will find a way to participate.”

The regional talks, drawing wide participation from the Middle East and from countries with an interest in the area, are intended to complement the bilateral peace talks between Israel and each of its immediate Arab neighbors--Syria, Lebanon, Jordan and the Palestinians.

Syria and Lebanon decided earlier to boycott all of the regional meetings. So the economic development and refugee sessions will be attended by only two of the front-line parties to the Arab-Israeli conflict--Jordan and the Palestinians.