CAIRO, JUNE 20 -- The Palestine Liberation Organization tonight called the U.S. decision to suspend diplomatic contacts with it "an unfriendly and provocative act" and said the group would ask Arab countries to implement economic sanctions against the United States.

PLO spokesman Jamil Hilal, speaking in Tunis, said the U.S. move was "a blow to the peace process" and would contribute to an escalation of violence in the Israeli-occupied territories.

Palestinians and diplomats said today that the American decision came as many PLO members were already disillusioned with the 18-month dialogue and in a rebellious mood against PLO Chairman Yasser Arafat's moderate line.

The conditions set by Washington for a resumption of the dialogue are therefore unlikely to be met in the short term, they said, raising the prospect of a long break in relations and no early resumption of the peace process.

In Baghdad, a spokesman at Arafat's residence declined comment on the U.S. announcement.

Another senior PLO leader, Salah Khalaf, said that the decision "insults the Arab nation, means a full aligning of the United States to Israel and . . . means the United States is responsible for any terrorism in the area in the future."

"We are sorry about this decision, which freezes the peace process in the Middle East and encourages the Likud government, which is not a moderate government," said Khalaf, who also is known as Abu Iyad. "In spite of that, we will continue our initiative, the Palestinian peace plan."

Moderate Palestinians said the U.S. move will give ammunition to PLO extremists, who have long criticized Arafat for his 1988 decisions to recognize Israel and renounce terrorism in order to establish the dialogue with Washington.

"They will be very glad about it because they think it will embarrass Arafat," said PLO official Mohammed Subeih. "They want to change the strategy in the region."

Subeih said the U.S. move also will hurt efforts by moderate Arab states such as Egypt and Saudi Arabia to resurrect the peace process, "but it will leave {Libyan leader Moammar} Gadhafi very happy."

Libya allegedly helped organize the May 30 attempted raid by a hard-line PLO faction against Israel's coast that led to President Bush's decision to suspend the U.S.-PLO dialogue.

Arafat said his organization's "institutions and official forces" had nothing to with the raid, but he refused to meet U.S. demands for a condemnation of it and for disciplinary action against Mohammed Abul Abbas, whose faction carried it out.

The PLO leadership close to Arafat clearly did not want the United States to suspend the group's hard-won dialogue. But many PLO officials said Arafat had difficulty meeting the U.S. demands because of widespread anger and frustration with Washington among his rank and file. This anger was further fueled by the U.S. veto on May 31 of a U.N. Security Council resolution for a U.N. team to look into alleged Israeli abuses of Palestinian human rights in the Israeli-occupied West Bank and Gaza Strip.

"We are sick and tired of the United States bullying us. I don't think they understand that," said Cairo-based PLO official Nabil Shaath. The "bullying," he said, consisted of "demand after demand that the PLO does this or else, does this or else. At the same time, there was no such similar action taken against Israeli crimes" in the occupied territories.

"People say enough is enough, particularly since the payoff is so little. Had it not been for the bullying, we would have condemned the {May 30th} operation," Shaath said. Some diplomats and PLO officials predicted that the U.S. action will increase demands to move up a scheduled November meeting of the PLO's legislative body, the Palestine National Council, to reconsider its 1988 endorsement of Arafat's decision to negotiate.

Unless the PLO's hostility toward the United States -- now shared by many Arab states -- is defused when the PNC meets, it is likely to be in an even more aggressive mood, Subeih said. "If the PNC is in a bad mood, Abbas will win."

The United States had asked the PLO to punish Abbas by expelling him from his position on the executive committee, from whose meetings he already is barred.