BAGHDAD, IRAQ, JUNE 21 -- The Palestine Liberation Organization said tonight that the U.S. decision to suspend its dialogue with the PLO constitutes "a challenge" to the Arab League states since Washington has halted its dealings with one of the league's members.

The statement, issued by the 15-member executive council after a two-day meeting here, was the PLO's first formal reply to President Bush's decision Wednesday. It called on the Arab states to implement the resolutions of the summit conference the Arab League held here three weeks ago, but it did not specify which ones.

The summit's final communique May 30 called for member states to evaluate "Arab relations with other countries in the light of those countries' attitudes toward the Palestinian national rights." Tougher language calling for economic sanctions and the use of oil as a weapon to bring about a change in U.S. Middle East policies was considered at the summit at the request of the PLO and Iraq but was not included in the joint communique.

"What is requested vis-a-vis the American decision in particular should exceed the limits of an expression of regret and denunciation, as the American administration in this decision has suspended its dealings with a member of the League of Arab States," today's statement said.

The executive council said the U.S.-PLO dialogue "has been a step on the road to peace," and it added that the PLO "still sticks to" its November 1988 decision to use negotiation to resolve its conflict with Israel.

PLO Chairman Yasser Arafat made a brief appearance at the PLO's embassy here while the statement was being translated, but he declined to answer questions from a reporter. "That is my answer," he said, pointing to the five-page statement.

{In Cairo, Egyptian President Hosni Mubarak said he regretted the U.S. decision and saw Israel's "increased intransigence" as the main obstacle to peace, the Reuter news agency reported.}

The PLO's statement indicates that the organization hopes to marshal some kind of a united Arab response to the U.S. move. It called the U.S. decision a "blow to the credibility of the American administration," and said it "contradicts the responsible attitude that a superpower . . . is supposed to uphold regarding the peace process in the Middle East."

The U.S. move "undermines and decreases" Washington's role in the peace process, since it breaks off communication with "the major party without which . . . making peace in the Middle East is not possible," the PLO said.

If the United States is trying to create an alternative to the PLO, the statement said, then it "will discover that it will not find anyone from our Palestinian people who will listen or talk to it. Our people will boycott all contacts with Israeli or American officials."

The PLO leadership gave no sign that it was ready to budge on the conditions the Bush administration has set for a resumption of the dialogue: condemnation of a foiled seaborne raid by a maverick PLO faction May 30 on the Israeli coast near Tel Aviv in which four Palestinians were killed but no Israelis were injured, and expulsion from the PLO executive council of Mohammed Abul Abbas, whose group organized the attack.

The PLO reiterated that it was not involved in the raid as an organization and that its National Council, a legislative body next scheduled to meet in November, "is the final reference" for any disciplinary action against an executive council member.

The PLO has said it is conducting its own investigation into the raid, but it has not yet released any findings.

It said today that it had already reconfirmed its commitment to a declaration by Arafat "renouncing terrorism in all its forms." It complained, however, that "we have not seen the {U.S.} administration" reacting similarly to "Israeli crimes against Palestinians."

The statement said also that, in its 18 months, the U.S.-PLO dialogue had "always been beating around the bush" and "avoided tackling the essential issues." It said this reflected "the lack of seriousness in the position of the American administration."

It charged that the U.S. move "is unfortunately in response to the requests of AIPAC {American-Israel Public Affairs Committee} and the Israeli government," and demonstrates that these two "continue to control American policy-making regarding the Middle East."