* Gaza may reject peace deal recommended to all Palestinians
* Israel may reject peace deal recommended by Netanyahu
By Douglas Hamilton
JERUSALEM, Aug 25 (Reuters) - It's the proverbial elephant in the room, the ghost at the banquet, the spectre no one wants to acknowledge. Even if Israel and the Palestinians can scale a mountain of scepticism and reach a peace treaty in the next 12 months, 40 percent of Palestinians would be part of it in name only, because they live in the Gaza Strip. Gaza's Islamist Hamas rulers say they will never give Israel what it most wants from a Middle East deal, which is recognition of the Jewish state and a legitimate place in the Middle East.
They see their Fatah rivals in the West Bank, who will be negotiating with Israel over the coming year, as appeasers and traitors to the 2.5 million Palestinians in their charge. Hamas will not attend the talks.
A settlement to "establish a Palestinian state in the West Bank and Gaza", as key texts have put it for 20 years, would start life with a fictional element. As things stand now, about 1.7 million Palestinians would be excluded from statehood.
But no-one wants to drown new hopes at birth, so this unwelcome fact is ignored as direct peace talks resume under U.S. auspices with a Washington summit banquet on Sept 1.
In a letter to European Union foreign policy chief Catherine Ashton agreeing to the talks, Palestinian President Mahmoud Abbas made no mention of Gaza -- a territory separated not only by geography from the West Bank he administers but also by a deep ideological divide.
All Abbas wrote was: "We note that a state with provisional borders is not an option for the Palestinian people."
Asked by Israeli television recently how he would square the circle, Abbas said: "We will solve the problem of Gaza and Hamas." But he did not say how. Last week he told reporters: "If we reached a peace agreement tomorrow, we wouldn't be able to implement it without ending this split."
This not the only elephant in the room. Israel is also divided over the wisdom of accepting a Palestinian state.
Any peace deal would involve Israeli concessions that would be opposed by a substantial bloc of what analyst George Friedman of Stratfor describes as a "caustic and churning" political system that tends towards paralysis.
Nearly any faction in Prime Minister Benjamin Netanyahu's six-party coalition could derail an agreement, Friedman said. "There has not been an Israeli leader since Menachem Begin who could negotiate with confidence in his position."
In 2005 Ariel Sharon, later felled by a stroke, overcame opposition to win coalition backing for Israel's unilateral withdrawal from Gaza, forcing Jewish settlers out in scenes that provoked national anguish.
Should Netanyahu make a deal with Abbas, it would involve even bigger settler withdrawals or evictions. But with cabinet backing, possibly endorsed by a general election, Israel could hope for peaceful implementation of an eventual treaty.
But just how Abbas could implement his side of a bargain that would legally apply to Gaza is another question. It is now a territory over which he has almost no control, from which Fatah forces were expelled by Hamas gunmen in 2007.
In a speech in Damascus on Tuesday, Hamas leader Khaled Meshaal said Abbas was too weak to cut a just peace with Israel.
"If the talks succeed they will succeed to Israeli standards and liquidate the Palestinian cause. They'll give us parts of 1967 lands. They'll draw the borders as they want and they'll confiscate our sovereignty," he said. "Our project is resistance."
Western diplomats believe efforts to reconcile Hamas and Fatah will be off the agenda entirely for the 12-month duration of negotiations.
Meshaal will surely wait to see whether talks progress or Abbas starts to look like he's failing, before making his move.
Western diplomats say if Abbas struck a deal with Israel, Hamas could either reconcile with Fatah and support it, or allow the people of Gaza to vote on the settlement in a referendum, or reject it outright and give the electorate no choice.
"Were Fatah to make the kinds of concessions that might make a peace agreement possible," said Friedman, "Hamas would not only oppose them but would have the means of scuttling anything that involved Gaza."
Since Hamas still has support in the West Bank, substantial risks lie ahead should the talks fail, including the possibility of calls for a return to anti-Israeli violence.
But Gaza is bankrupt and Hamas, despite its possibly growing closeness to Iran, still relies heavily for financial support on Arab states and a share of the aid money Abbas receives from his Western backers. This dependence could give Abbas leverage.
If either the Palestinians or the Israelis, or both, proved too divided to implement a negotiated settlement, an alternative exists: the United States and its major power partners could try to impose a deal, recognising the Palestinian state that Prime Minister Salam Fayyad plans to have ready by mid-2011.