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Israel's divided inner Cabinet has rejected an Egyptian peace plan calling for talks with a Palestinian delegation in Cairo.

After two days of debate, the 12 leaders of the coalition government of the rightist Likud bloc and the center-left Labor Party voted Friday along party lines and deadlocked 6 to 6 on the issue.The tie vote automatically defeated a proposal by Vice Premier Shimon Peres, head of Labor, to accept the Egyptian invitation.

"Israel today suffered a severe setback," said Labor's defense minister, Yitzhak Rabin.

All Labor ministers in the policy-making inner Cabinet voted to support the Egyptian plan and all Likud ministers voted to reject it. Peres and other Labor ministers met immediately to discuss their next step.

Police Minister Chaim Bar-Lev, also of Labor, called for the party to leave the government. But Rabin said he first wanted to see the reaction of the Egyptians and the international community.

David Levy, a leading member of Likud headed by Prime Minister Yitzhak Shamir, said: "The Labor proposal . . . was contradictory to the initiative accepted by the government."

The Israeli government proposed on May 14 that elections be held in the occupied West Bank and Gaza Strip to select representatives to negotiate on autonomy for the 1.7 million Palestinians of the territories.

Levy said meeting with a Palestinian delegation as proposed by Egypt was unacceptable to Likud because it was a backdoor attempt to hold talks with the Palestine Liberation Organization. Egyptian President Hosni Mubarak had called for including Palestinians from outside the occupied territories.

"The prime minister formulated it well when he said that if we adopt (Labor's proposal), we recognize the PLO . . . Israel would have walked into a trap," said Levy.

He said the government would continue with its election proposal.

The Cabinet apparently failed to agree on a widely discussed compromise presented by Foreign Minister Moshe Arens. He quoted U.S. Secretary of State James A. Baker III as suggesting that Israel, Egypt and the United States consult on the makeup of a Palestinian delegation to negotiate with Israel.

But Peres questioned whether there was a firm U.S. offer to hold three-way talks on the issue. He pushed instead for Mubarak's proposal to hold talks in Cairo with a 10-member Palestinian delegation.

Speaking on Israel radio before today's meeting, Peres also accused Shamir and Likud of stalling and trying to evade peace negotiations.