Margin of UN defeat disappoints Israel
* UN vote lays bare EU anger at Israeli settlements
* Israel tries to minimise loss, faces tough decisions
* Next govt will have to address Palestinian issue
JERUSALEM, Nov 30 (Reuters) - The margin of Israel's defeat in a U.N. vote that granted de-facto statehood to Palestine has disappointed Israeli political leaders, whose attempts on Friday to play down the loss could not disguise its significance.
The United Nations General Assembly voted on Thursday to upgrade the Palestinian status in the world body, making it a "non-member state". The decision was backed by 138 nations against 9 opposed, with 41 members abstaining.
On the ground nothing has changed. Israeli army checkpoints remain in place across the West Bank, Jewish settlers continue their daily lives and the Israeli government warns that lasting peace is more remote than ever.
But the fact only three major countries sided with Israel -- the United States, Canada and the Czech Republic -- underscored how isolated Israel has become on the international stage when it comes to peacemaking with the Palestinians.
"Even old friends like Germany refused to stand alongside us. There were external factors, but it is hard not to see this as a total failure for our diplomacy which will obviously have consequences," said a senior official, who declined to be named.
Government spokesman Mark Regev said that although Israel was "disappointed" by the vote it was not surprised.
"The General Assembly can resemble the theatre of the absurd, which once a year, automatically approves ludicrous, anti-Israeli resolutions. Sometimes these are supported by Europe, sometimes they are not," he said.
Nonetheless, analysts said the vote exposed the gulf that has opened between Europe and Prime Minister Benjamin Netanyahu over his handling of the Western-backed administration of Palestinian President Mahmoud Abbas, and the depth of EU opposition to Jewish settlement expansion.
Direct peace talks collapsed in 2010 in a dispute over settlement building in the occupied West Bank and East Jerusalem -- land Palestinians say belongs to them.
EU diplomats warn of an approaching tipping point whereby it will soon be impossible to carve out a viable independent state.
"The government has failed to appreciate the gravity of the challenge to Israel's fundamental legitimacy in Europe," said Gidi Grinstein, the head of the Reut Institute think-tank.
"The Palestinian bid in the U.N. is turning out to be a bigger defeat than anticipated," he added.
In many ways, Israel was caught off guard.
Last week it was fighting Islamist militants in the Gaza Strip, grateful to see much of the West offering support for its determination to stop indiscriminate rocket fire from the Palestinian enclave whose leaders deny Israel's right to exist.
The eight day bombardment ended in a ceasefire that was widely viewed as handing the Hamas rulers of Gaza a PR boost at the expense of Abbas and the Palestine Liberation Organisation, who have renounced violence in favour of diplomacy.
The West pumped billions into Abbas's administration over the years to bolster a partner for Middle East peace and felt they had to rally to his support in New York. Before the Gaza conflict, the Palestinians said they would win 115 'yes' votes at the United Nations. They ended up with more.
Israeli leaders said on Friday the support of Washington was paramount and warned that the Palestinians would suffer for their unilateral actions.
"If I have to choose between the United States, Israel's biggest ally which morally stands above all other nations, and the 138 other countries, I will always choose the United States," said deputy foreign minister, Danny Ayalon.
Israel knew it would lose, but hoped to win support from a strong "moral minority". That did not materialise.
However, ministers have toned down their earlier threats of retaliation, warning only of severe repercussions if Abbas uses his newfound position to join the International Criminal Court (ICC) in the Hague and pursue Israel for alleged war crimes.
The Geneva Convention forbids occupying powers from moving "parts of its own civilian population into the territory it occupies", leaving Israeli officials potentially vulnerable to an ICC challenge. Israel says its settlements are legal, citing historical and Biblical ties to the West Bank and Jerusalem.
The Palestinians say they are in no rush to go to the ICC, but the threat is there, putting pressure on Israel to come up with creative solutions to overcome the peace-talks impasse - which the Jewish state blames on Abbas.
"This U.N. vote is a very strong signal to the Israelis that they can't shove this matter under the carpet for any longer," said Alon Liel, former director-general of the Israeli Foreign Ministry. "This is a red light for Israel."
With politicians campaigning ahead of a Jan. 22 election, Israel is unlikely to change course.
Opinion polls suggest Netanyahu's right-wing bloc will win a new term in office. The coalition includes pro-settler parties, and the prime minister's own Likud group appeared to shift to the right in primaries this week, making any land-for-peace compromise with the Palestinians look more complex than ever.
His opponents seized on the U.N. vote. Labor party leader Shelly Yachimovitch blamed Netanyahu and Foreign Minister Avigdor Lieberman for belligerent rhetoric, saying they were blind to what was happening in the Middle East.
Ex-foreign minister Tzipi Livni, aspiring to become Israel's second female prime minister, blamed a failure of initiative
"When we do not initiate we are imposed upon," she said.
Israeli officials say the Palestinians themselves must show they are ready to make the sort of concessions that they believe are needed to secure an accord - such as renouncing any right to return to modern-day Israel for refugees and their descendants.
However, analysts say that with the elections out of the way, the new government will have a period of calm to try once more to end their decades-old conflict with the Palestinians.
"The strategy toward the Palestinian Authority and statehood is likely to be on the top of the agenda of the next government in the winter," said the Reut Institute's Grinstein.
"The outcome of its strategic reassessment may well be active engagement in upgrading the powers and responsibilities of the Palestinian Authority toward statehood, and eventually recognising the Palestinian Authority as a state."