There had been angry protests by Arab and other Muslim countries after reports that Disney had intended to refer to Jerusalem as the country's political capital as part of a millennium exhibit celebrating Israel's culture and history.

A Disney spokesman refused to say whether the decision was the result of a meeting between the company president Al Weiss and Arab leaders earlier this week.

The decision is likely to infuriate Israel, which has contributed $1.8m dollars towards the Israel pavilion at Disney's Epcot Park in central Florida.

Israeli politicians, from Prime Minister Ehud Barak, to Likud leader, Ariel Sharon, have denounced the threat of a boycott.

Arab and other Muslim states had threatened to boycott the company

The status of Jerualem is one of the thorniest issues in the Middle East peace process.

Israel regards Jerusalem as its eternal and indivisible capital although it is not recognised internationally as such. The Arab world wants the mainly Muslim eastern half of the city to be the capital of a future Palestinian state - the east side of the city was captured and annexed by Israel in contravention of international law.

Disney came under very strong pressure to make sure the exhibit did not portray Jerusalem as the political capital of Israel.

Earlier this week, a member of the Saudi royal family and major shareholder in the EuroDisney operation in France, Prince Al Walid bin Talal, said he had intervened personally with the Disney chairman, Michael Eisner, urging him to change the theme of the exhibition.

Arab Americans threatened to boycott Disney's theme parks, films, shops and products and leading Shia cleric in Beirut attacked Disney as a zionist Jewish firm during his Friday sermon.

But Israeli Foreign Minister, David Levy, said the country had an agreement with Disney. The pavilion was supposed to present Jerusalem in all its glory, in all its history, he said.