UNITED NATIONS (Reuters) - Palestinian President Mahmoud Abbas asked theUnited Nations on Friday to recognize a state for his people, even though Israel still occupies its territory and the United States has vowed to veto the move.

Abbas handed U.N. Secretary-General Ban Ki-moon a letter requesting full U.N. membership, which the Security Council must consider -- although this may take some time.

"We extend our hands to the Israeli government and the Israeli people for peacemaking," Abbas said in a speech setting out his case to the U.N. General Assembly, which greeted him with a standing ovation.

His appeal to the council reflects a loss of faith after 20 years of failed peace talks sponsored by the United States, Israel's main ally, and alarm at relentless Israeli settlement expansion eating into the land Palestinians want for a state.

It also exposes Washington's dwindling influence in a region shaken by Arab uprisings and shifting alliances that have pushed Israel, for all its military muscle, deeper into isolation.

"Our people will continue their popular, peaceful resistance," Abbas declared. "This (Israeli settlement) policy will destroy the chances of achieving a two-state solution and ... threatens to undermine the structure of the Palestinian National Authority and even end its existence."

It was the first time Abbas has spoken so starkly of the prospect of the PA's demise, highlighting the predicament faced by a body set up as a state-in-waiting but now seen by its critics as a big municipality, managing the civilian affairs of the main Palestinian cities under Israeli occupation.

Israeli Prime Minister Benjamin Netanyahu was due to follow Abbas to the U.N. podium to argue that only direct negotiations between the two sides can lead to a Palestinian state.

President Barack Obama, who told the United Nations a year ago he hoped Palestinians would have a state by now, said on Wednesday he shared frustration at the lack of progress.

But he said only Israeli-Palestinian negotiations, not actions at the United Nations, could bring peace -- despite a long history of fruitless peace talks.

Abbas is resorting to the United Nations even though Israeli and U.S. politicians have threatened financial reprisals that could cripple the PA, which employs 150,000 people.

Palestinian negotiator Saeb Erekat said the PA could dissolve itself, throwing responsibility for ruling the whole of the West Bank back to Israel as the occupying power.

"We will invite you to become the only authority from the River Jordan to the Mediterranean," he told Israel Radio.

In the West Bank, Palestinians expressed a mix of pride and wary anticipation ahead of their U.N. claim to statehood.

Flags and portraits of Abbas and his predecessor, the late Yasser Arafat, draped buildings in a central Ramallah square where Palestinians awaited a live broadcast of Abbas' speech.

"This is something we should have done a long time ago," said Khaled Shtayyeh, 42, carrying a Palestinian flag. "It was always stopped by international pressure. I am very proud.


A gulf of mistrust separates Israelis and Palestinians, who each feel their existence is at stake in a bitter struggle over borders, security, refugees and Jerusalem.

Political rifts among Palestinians, and the constraints of U.S. domestic politics, where support for Israel is strong, further complicate efforts to bridge the gaps.

The divisions are rooted in a heavy burden of history, painfully contested narratives and recurring bloodshed.

The United Nations partitioned Palestine in 1947, but Arab states rejected that and declared war on the new state of Israel, which then captured more territory than it had been allotted under the U.N. plan and dispossessed hundreds of thousands of Palestinians, who became refugees.

Two decades after Israel seized the West Bank, including east Jerusalem, and theGaza Strip in the 1967 Middle East war, the Palestine Liberation Organizationrecognised Israel and reduced its demands to a state on those territories.

A 1993 agreement signed by PLO leader Yasser Arafat and Israeli Prime Minister Yitzhak Rabin set out a plan for Palestinian self-rule, which was never fully implemented.

Israel has continued to expand settlements in the West Bank, although it dismantled them in the Gaza Strip, now ruled by Hamas Islamists who refuse to recognize the Jewish state.

Palestinian uprisings erupted in 1987 and 2000, but failed to end Israeli occupation or bring statehood closer.

Secretary of State Hillary Clinton said the United States would continue to push for a durable, negotiated peace.

"Regardless of what happens tomorrow in the United Nations, we remain focused on the day after," she said on Thursday.

Abbas, who has won new popularity at home for his U.N. plan, accepts that negotiations are still necessary, but argues statehood will put Palestinians on a more equal footing.

Israel sees the initiative at the United Nations as a sinister attempt to shear away its own legitimacy.

Hamas rejected Abbas' statehood bid as unworthy.

"Our Palestinian people do not beg for a state," said Ismail Haniyeh, who heads the Hamas administration in Gaza.

"States are not built upon U.N. resolutions. States liberate their land and establish their entities.

Diplomats are trying to limit the fallout from the Palestinian statehood application.

The Security Council could delay action on Abbas' request, giving the mediating "Quartet" -- the United States, Russia, the European Union and the United Nations -- more time to craft a declaration that could coax the two sides back to the table.

But the Quartet, whose envoys met again on Friday, has spent months trying to agree on a statement acceptable to the parties.

Italian Foreign Minister Franco Frattini said the Quartet would await the speeches of Abbas and Netanyahu before setting out "some guidelines, key points and even some red lines."

"It's better to take one or two days more, rather than accelerating and having a weak statement," he said.

French President Nicolas Sarkozy has proposed that the General Assembly vote to upgrade the Palestinians to a "non-member state," while reviving direct peace talks.

Israel rebuffed the idea. "A Palestinian state should be the outcome of negotiations, which means a Palestinian state should mark the end of conflict and cessation of claims," Netanyahu's cabinet secretary, Zvi Hauser, told Israel's Army Radio.

(Additional reporting by Nidal Almughrabi in Gaza, Tom Perry in Ramallah, Dan Williams in Jerusalem; Eric Thayer, John Irish, Ali Sawafta and Arshad Mohammed inNew York; Editing by Doina Chiacu)