The U.S. agreed to resettle 1,350 Palestinians displaced by fighting in Iraq, marking the largest resettlement ever of Palestinian refugees in the nation.

The decision appears to signal a shift in Washington's previous position against resettling Palestinians out of concern about the potential impact on U.S. relations with Israel and the Arab world. The resettlement, which is slated to begin this fall, is likely to elicit strong reactions from people on both sides of the Israeli-Palestinian conflict.

A...