he Cyprus government yesterday rejected a proposal by Turkish Cypriots for the creation of a U.N.-supervised interim administration for the deserted city of Varosha. The government dominated by Greek Cypriots, also reacted angrily to Washington's approval of the proposal, saying it was an "inadmissible" interference in Cypriot affairs.

The offer, made Thursday by Turkish Cypriot leader Raouf Denktash, would allow 35,000 Greek Cypriot refugees to return to the homes they fled in 1974 during the Turkish invasion of Cyprus once peace talks between Greek and Turkish Cypriots have resumed.

Cypriot President Spyros Kyprianou, in his rejection of the Danktash offer, said it was "nothing but a soap bubble" designed to influence the impending vote in the U.S. Congress over lifting a three-year arms embargo against Turkey. The ban was imposed to protest continued occupation of Cyprus by Turkish troops after the invasion.

Both the White House and the State Department yesterday praised the Denktash proposal, calling it "a positive and forthcoming step." A State Department spokesman said the proposal was a clear indication of the desire of Turkish Cypriots "to be conciliatory and to negotiate in earnest towards a just and enduring solution of the Cyprus problem."