DISNEY OPENS CAN OF WORMS OVER MIDEAST.

Byline: James Sterngold with Deborah Sontag The New York Times

What began as an effort by the Walt Disney Co. to present a brightly optimistic exhibition on foreign cultures for the millennium has blown up in its face this week, with Arab, Israeli and Jewish groups angrily re-enacting all the bitterness of Mideast politics on a theme-park stage. The focus of the controversy is the way a new Israeli pavilion at Disney World depicts Jerusalem.

Arab leaders and the prime minister of Israel, Ehud Barak, have weighed in, and there have been threats of economic boycotts or other consequences if Disney is perceived to favor one side or the other. The massive, usually voluble public relations machinery of the entertainment conglomerate has ground to a state of paralysis this week, and the company's chairman, Michael Eisner, was reportedly forced to call a Friday meeting of Disney's board of directors to decide how to respond.

The company refused to confirm the board meeting and late Friday issued a statement that attempted to skirt the issue by describing the exhibit, partly financed with $1.8 million from the Israeli government, by stating, ``We are an entertainment company, and we do not take political positions.''

But both sides in the dispute insisted it already had, and both sides said they will be outraged if Disney capitulates to the other. A decision is urgent, since the 2,400-square-foot pavilion, part of an expensive Millennium Village at the Orlando, Fla.-based theme park, is scheduled to open Oct. 1.

``We understand Disney would like to have it a fun world after all, but it isn't,'' said Abraham H. Foxman, the national director of the Anti-Defamation League of B'nai B'rith.

The pavilion offers a set of exhibits on Israel, including Journey to Jerusalem, a simulation ride that waltzes through the tangled history of the Holy City. The Israeli Foreign Ministry, which was consulted on the display, said that it acknowledges the importance of the city to Muslims and Christians as well as Jews, but that Disney promised from the start that ``the centrality of Jerusalem as the capital of Israel would be emphasized.''

It appeared late Friday that the Walt Disney Co. had slightly modified the pavilion to try to remove that thorn from the side of Arab countries. The company refused to say if it had changed the exhibit, but it did say ``there is no reference to Jerusalem as the capital of Israel within the exhibit.''

Israel maintains that an undivided Jerusalem is its capital, while Arabs insist that portions of the Holy City have been illegally occupied by the Israelis since they were seized in the 1967 war from Jordan. Arab groups are arguing that by not depicting Palestinian claims on the Holy City, Disney has become a one-sided political mouthpiece for Israel.

Making the dispute all the more contentious is the fact that this theme-park battle takes place just as the Israelis are beginning highly sensitive negotiations with the Palestinians on the future status of Jerusalem.

Senior Disney executives met at the Hay Adams Hotel in Washington on Wednesday with a number of Arab leaders to discuss their complaints, and Eisner fielded telephone calls from Jewish leaders. Disney has refused to comment on the outcome of the talks.

The company declared in its statement Friday that the exhibit is merely an effort to allow various countries, such as Eritrea, Scotland and Brazil, a chance to ``tell stories of their cultures and people in ways that are interesting, informative and entertaining. We believe that our guests will find the Israel exhibit to be one part of that effort.''

The United Arab Emirates, whose luxury malls serve as the consumer marketplace for the Arab region, has already said, though, it will urge Arab countries to boycott Disney and Disney products if the pavilion does characterize a united Jerusalem as the Israeli capital.

``We understand that Disney is involved in commercial activities and is subject to commercial rules,'' said Khalid Abdalla, the chief representative of the Arab League in Washington and a participant at the meeting on Wednesday. ``But if a commercial operation chooses to get involved in politics, it is no longer subject to commercial rules, but to a different set of rules. In our opinion Disney is taking sides with a distortion of historical events.''

Sheikh Abdullah bin Zaid Nahayan, the information and culture minister of the Emirates, said earlier this week, ``We can do a lot of damage to this company's business.''

Additional pressure was reportedly brought on the company by a Saudi prince, Alwaleed Bin Talal Bin Abdulaziz, who owns a major portion of EuroDisney, the French theme park operated by the Walt Disney Co.

Jewish and Israeli groups have charged that, even by meeting with the Arabs, Disney has succumbed to economic blackmail and compromised itself.