Peru's foreign minister called Morales an enemy of Peru after the Bolivian president said the clashes between police and indigenous protesters in the resource-rich jungles, which killed at least 30 people, amounted to genocide induced by free trade.
"What is happening in Peru, I'm convinced is the genocide of the indigenous people through the FTA (free trade agreement), privatization, the handing over of South America's Amazonian jungles to transnational corporations," said Morales, Bolivia's first indigenous president.
Peruvian Foreign Minister Jose Antonio Garcia Belaunde rejected the charge and blamed Bolivia and Venezuela for inciting the unrest, in which protesters and police died after police were sent in to end weeks of protest blockades of highways and oil and gas pipelines in northern Peru.
Lima believes that as oil- and gas-producing countries, Bolivia and Venezuela want to stop Peru from exploiting its own resources and becoming a competitor.
On Tuesday Peru withdrew its ambassador in La Paz.
Native tribes say Peruvian President Alan Garcia went too far in passing laws related to a free-trade agreement signed with the United States.
They worry that he will turn their jungle habitat over to foreign oil, gas and mining companies and that the destruction of the rainforest will be sped up and their control over natural resources and ancestral lands will be undermined.
Despite the setbacks to his foreign investment drive, Garcia plans to push ahead with the model he thinks will lift millions out of poverty.
Peru's president still hopes to convince the tribes, some 60 percent of whom live in poverty, that his conservative policies based on foreign investment and free trade will give them a better life.
But heads are expected to roll in Garcia's Cabinet over wide international criticism raining down after the government resorted to deadly force after clearly bungling negotiations with protesters.
Peru's Prime Minister Yehude Simon apologized to native leaders Tuesday and said he would step down in the face of opposition demands after working to get the laws repealed.
Native leaders say the lingering protests will be called off when Congress does just that.
Yet other Cabinet ministers are expected to lose their jobs in upcoming weeks over the fiasco. A former interior minister has speculated that the justice, environment, trade and agriculture ministers will be asked to step down.