Lebanon fears it would have to absorb hundreds of thousands of Palestinian refugees, diplomatic sources said on Monday.
At a meeting of Arab foreign ministers in Cairo, the Saudis circulated a document which also revives the Saudi peace initiative endorsed by the Beirut summit in 2002.
The main informal initiative, known as the Geneva Accord, was agreed in Switzerland last year by leading Israeli dove Yossi Belin and former Palestinian minister Yasir Abd Rabbu.
It goes beyond previous Arab initiatives by giving Israel the right to decide how many Palestinian refugees to take back.
Lebanese officials have said that formula would not be acceptable because it does not include a solution for about 300,000 Palestinians who live in Lebanon as refugees.
Lebanon says that giving them citizenship is not an option because of the effect it would have on the delicate demographic balance in the country.
The Lebanese civil war, which raged from 1975 to 1990, began as a conflict between the Palestinians and their local allies on one side and Christians opposed to their presence on the other.
The Arab diplomats said Egypt and Syria were likely to favour the Saudi proposal to endorse the Geneva Accord while Lebanon and the Palestinians would have reservations.
The proposal to revive the Saudi initiative is much less controversial because Arab leaders have already accepted it.
The initiative offers Israel peace and full recognition by all Arab countries if it withdraws to the borders before the 1967 war, when Israel captured the Gaza Strip, the West Bank and the Golan Heights.
Officials of 22-member Arab
League are present in Cairo
Arab diplomats say they do not expect the foreign ministers or an Arab summit in Tunis this month to make any significant changes to the Saudi plan, because they do not rate highly the chances that the Israeli government will accept it.
But in the absence of any intensive US mediation between Israelis and Palestinians, the Arab governments have said they feel an obligation to remind the world of their own offer.