A DIPLOMATIC quarrel has erupted over Israel launching a controversial 16-month celebration of Jerusalem's 3,000th anniversary that brings the future status of the city back to the top of the political agenda. The absence of American Ambassador Martin Indyk, the first Jewish US ambassador to Israel, at the gala opening Monday night has drawn a furious reaction from Israel. Israeli Prime Minister Yitzhak Rabin accused the United States and other absentee countries of ''abandoning'' the ceremony. Ambassador Indyk denied that the US boycotted the event, insisting that he had ''prior commitments.'' But the row has intensified the debate over Israel's claim of sovereignty over all Jerusalem as the ''eternal capital'' of the Jewish state. Muslim and Arab countries, which boycotted the event, say that the celebration is an attempt by Israel to sway international opinion in favor of its claim of sovereignty over Jerusalem. According to the Israeli-Palestinian self-rule agreement signed in September 1993, final status negotiations about the city's future are due to start in May next year. Palestinian leaders claim eastern Jerusalem, captured by Israel in the 1967 Arab-Israeli conflict, as the capital of a future Palestinian state. ONLY 17 out of 70 invited ambassadors attended the sound-and-light spectacular that was watched from the Knesset veranda by 3,000 invited guests. None of Israel's major Western allies or trading partners showed up. Individual countries did not give reasons for staying away, but the European Union announced last month that it would boycott the celebrations and withdraw funding from organizations that were included on the Jerusalem 3,000 program. The EU contends that the celebrations emphasize the Jewish history of Jerusalem at the expense of its Muslim and Christian past. At the opening ceremony, speeches by Mr. Rabin and Jerusalem Mayor Ehud Olmert, a member of the right-wing Likud opposition, focused on the Jewish history of the city designated as the capital of the Jewish Kingdom by David 3,000 years ago. Rabin stressed that Jerusalem, divided by walls and checkpoints between 1948 and the 1967 six-day war, should never be divided again and that Israeli sovereignty should be maintained forever. ''United Jerusalem is the heart of the Jewish people and the capital of the State of Israel. United Jerusalem is ours,'' Rabin said. The international community does not recognize Jerusalem as the capital of Israel. Only two countries - Costa Rica and El Salvador - have embassies in the city. The Clinton administration is opposing legislation before Congress that seeks to move the US Embassy from Tel Aviv to Jerusalem by 1999, when the Israeli Palestinian agreement is due to be finalized. ''By putting any spotlight on Jerusalem, you are magnifying the realities that people want to ignore - the fact that Jerusalem is two cities,'' says Gershon Baskin, the Israeli co-director of the Israel-Palestine Center for Research and Information in Jerusalem. ''The more closely people look at Jerusalem, the more they will realize that the status quo won't wash,'' Mr. Baskin says.