Encounter with outgroup has been shown to elicit physiological stress response and when outgroup is perceived as threatening to one's own family and community, stress is higher. In such contexts, becoming familiar and learning to empathize with the other side may reduce stress. Building on the long-lasting Israeli-Palestinian conflict, we developed an eight-week group intervention focused on dialogue and empathy and tested it within a randomized controlled trial. Eighty-eight Israeli-Jewish and Arab-Palestinian adolescents (16-18 years) were randomly assigned to intervention or control groups. Before(T1) and after(T2) intervention, one-on-one interaction with outgroup member was videotaped, cortisol levels assessed five times during a 2.5-hour session involving exposure to outgroup stimuli, and adolescents were interviewed regarding national conflict. Intervention reduced cortisol response to social contact and reminders of outgroup (F = 4.92, p = .032, Eta2 = 0.109). This HPA-activity suppression was defined by two pathways. First, intervention had a direct impact on cortisol decrease; and second, intervention increased youth's behavioral empathy during one-on-one interaction with outgroup member and this empathic response mediated the effect of intervention on cortisol reduction. Adolescents' belief in the potential for reconciliation at T1 predicted greater empathy at T2. Our study provides the first evidence-based intervention for youth growing up amidst intractable conflict and demonstrates its impact on adolescents' physiological stress response to outgroup. Results contribute to research on the neurobiology of ingroup/outgroup relations, highlight the key role of dialogical empathy and social interactions for interventions targeting youth, and emphasize the importance of enhancing motivation for social inclusion for initiating positive behavioral and physiological processes. Clinical Trials Registry (NCT02122887; https://clinicaltrials.gov).