Trouble was brewing on the eve of a new round of Middle East peace talks here yesterday, as the Palestinians dispatched a delegation the Israelis said they would not talk to.

Palestinian exiles and prominent Palestinians from Jerusalem were on the team sent to Moscow in an attempt to join in the peace process from which they have been excluded so far at Israeli insistence.

Israeli Foreign Minister David Levy reiterated yesterday that he "will not allow any diversion from what we have agreed upon, the Madrid formula." At the Madrid talks which launched the negotiations only residents of the occupied West Bank and Gaza Strip were allowed to participate.

Russian officials appeared to back the Israeli stance. "The Moscow meeting will be attended by Palestinian representatives on the same terms as they participated in Madrid," said Mikhail Belonogov, a member of the Russian delegation.

But Palestine Liberation Organization leader Yasser Arafat says that before he agreed to Palestinian participation in Madrid the United States, a cosponser of the Moscow conference, promised that Palestinian exiles and Jerusalem Arabs would be brought into the talks at the multilateral stage.

Palestinian spokesmen also argue that with the these talks due to focus on regional issues such as water resources, arms control, the environment, and economic development, Palestinians from around the region should be allowed to participate.

Efforts were under way to reach a compromise, however, according to Vladimir Petrovsky, the head of the conference organizing committee. "We do face problems, they are being discussed, and we plan to find a solution satisfactory to all parties," he said yesterday.

Israel refuses to talk to Palestinians from Jerusalem, claiming that the whole city is part of Israel, or from outside the West Bank and Gaza Strip, on the grounds that only the future of the occupied territories is under negotiation.

Negotiations between the Palestinians and the two sponsers, Russia and the US, were expected to continue late into the night yesterday in a last-minute bid to agree on the composition of the Palestinian team.

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