Unlike today, there weren't active negotiations between the parties. The framework of a two-state solution was not accepted by either party. Simply put, there weren't relations to impact.

Israel did initiate a series of reprisal operations, killing PLO operatives. And they subsequently fought with the PLO in Lebanon during the civil war, and attacked them from afar in Tunisia. But relations hadn't exactly been friendly (or even existent) prior to the attack at the Olympics.