Jerusalem Mayor Teddy Kollek has decided to boycott a visit this week by Treasury Secretary W. Michael Blumenthal because the U.S. embassy asked Kollek to limit his official participation to activities in West Jerusalem, according to sources here.

U.S. officials told Kollek, the sources said that they did not want him to act as host for Blumenthal in East Jerusalem, which was formely under Jordanian control and was annexed by Israel after the 1967 war.

Kollek, who considers the rehabilitation of Old Jerusalem, in the eastern sector, to be one of his prudest achievements as mayor was repotted to have angrily refused a demand by the U.S. embassy that,if he accompanied Blumenthal into the East Jerusalem,he let the U.S. consul act as official host.

Kollek retorted that he is a mayor of all Jerusalem sources said and added he would not see Blumenthal under such circumstances.

Kollek's role in Blumenthal's visit was the subject of legthy negotiations between U.S. officials, who wanted the popular mayor to participate and Kollek's office. The Israeli Foreign Ministry reportedly has decided not to intervene.

American sources here expressed surprise at Kollek's reaction. They said that when U.S. visitors of Cabinet rank come to Jerusalem in the past such as former Treasury Secretary William Simon two years ago, it was standard procedure for tours of East Jerusalem to be private.

With a new rightist government ruling Israel and with diplomatic initiatives under way to resolve the problems of the occupied territories, however, thesituation of East Jerusalem has recently become more senstive.

Kollek, who has been in office for 12 years and is expected to be re-elected next year, has a reputation as a "dove" and a political maverick, although he has ties to the middle-of-the-road Labor alliance.