* Clashes increase after Gaza conflict, UN vote
* Financial woes, Israeli response might worsen situation
* Palestinians seek to ramp up cost of Israeli occupation
By Crispian Balmer
HEBRON, West Bank, Dec 18 Mohammad Salaymeh was killed on his 17th birthday after going to buy a cake for the family celebration, shot dead by an Israeli paramilitary policewoman just two years older than him.
The Israeli police called him a terrorist and said he had pulled a gun on guards manning a permanent checkpoint next to his house in this divided city. The gun turned out to be a child's toy and Salaymeh never got to his party.
"He was no terrorist. He was just a lovely kid," said Adel Salaymeh, a relative walking behind Salaymeh's funeral cortege, the teenager's face poking out of the green flag of the Islamic resistance movement Hamas that shrouded his body.
"The people don't want another Intifada (uprising), but if the Israelis carry on like this, then they will get one," he said, rain dripping from his forehead as a crowd of more than 1,000 walked briskly to the sodden cemetery.
As a winter chill falls on the West Bank, tensions are rising after years of relative calm, with clashes reported almost daily across the territory in a tangled ritual that has come to define 45 years of Israeli occupation.
Groups of Palestinian youths, their faces wrapped in a checkered Keffiyeh headdresses, hurl abuse, stones and the odd petrol bomb at soldiers, who respond with tear gas, stun grenades, rubber bullets and the occasional live round.
"Raids in Ramallah, arrests in Jenin, shootings and riots in Hebron. Scenes from the start of the Third Intifada?" said Amir Mizroch, editor of the Israel Hayom English-language news website.
Despite the friction, another sustained, organised uprising against Israeli occupation looks unlikely in the near future.
To a large degree, the Israelis themselves may determine which way the balance tips. A confrontational approach to security, unchecked violence by Jewish settlers or a poorly calibrated response to Palestinian diplomatic manoeuvring could yet unleash massive unrest in this rocky, arid territory.
"Uprisings come when people see that their interests and livelihoods are put under extreme pressure," Tayseer Khaled, a senior member of the Palestine Liberation Organisation (PLO), told Reuters. "An explosion in security is totally not in our interests, but the ball is in Israel's court."
UNREST AND PEACE
The West Bank instability is playing out against the backdrop of campaigning for an Israeli general election on Jan. 22. As Israeli society shifts to the right, politicians know they can win votes by appearing tough and uncompromising. This in turn raises the chances of a misstep or misunderstanding.
Even before the election was called, Yuval Diskin, the recently retired head of the Shin Bet internal security agency, was sounding the alarm. "When the concentration of gas fumes in the air is so high, the question is only when the spark will come to light it," he said in May.
The spark that lit the first Intifada in 1987 was an apparently banal road accident involving an Israeli army tank transporter that killed four Palestinians.
That uprising finished in 1993 having opened the way to the Oslo peace accords between Israel and the PLO, which promised an end to the decades-old Arab-Israeli conflict within five years.
The Second Intifada broke out in 2000 after the failure of a U.S.-led drive to negotiate a final peace settlement. Over the following seven years, more than 1,000 Israelis died, half of them in suicide attacks mostly against civilians, and more than 4,500 Palestinians were killed by Israeli forces.
The Palestinians lost ground in the court of world opinion as a result, and their appetite for resistance was curtailed. However, Palestinian self-belief has risen markedly in the past month, driven by different dynamics in the West Bank and Gaza Strip -- two territories divided geographically and politically.
An eight-day conflagration in Gaza saw the Islamic group Hamas fire rockets for the first time at Tel Aviv and Jerusalem, a feat that enabled the militants to claim victory once a ceasefire was agreed -- a verdict the Israelis dispute.
Days later, Palestinian President Mahmoud Abbas, whose administration has limited self-rule in the West Bank, won an overwhelming vote in the U.N. General Assembly, granting de-facto statehood on all the land seized by Israel in a 1967 war.
"The situation has changed in the space of a month. People feel much more confident," said Barkat Abu Senanih, a shoe maker from Hebron -- a perennially tense city where Arabs and Jews live side-by-side, constantly chafing against one another.
"But I don't think an Intifada is in the air. It's not like before. The politicians don't want it. Abbas won't let it happen," he added. Shoe boxes with Hebrew writing stacked in his shop show the ties that bind the Israelis and Palestinians.
The West Bank economy has grown some 40 percent since the end of the Second Intifada. Nowhere is that more visible than in Abbas's administrative capital, Ramallah. Gleaming stone and glass buildings have shot up, foreign aid has poured in and the quality of life is as good as in some European cities.
However, that well-being is built on shaky foundations.
Increased access to easy money saw personal Palestinian debt double from 2008 to the end of 2011, jumping 40 percent last year alone. The aid-dependent government can't balance its books and the World Bank predicts it will run up a budget deficit of 12.3 percent of gross domestic product (GDP) in 2012.
The trappings of wealth have helped stabilise society, giving people a future to build on. But the outlook is cloudy.
Angered by the U.N. statehood drive, which it said breached peace accords, Israel this month withheld $100 million of customs duties raised on behalf of the Palestinians. It said it will keep back at least $300 million more to cover unpaid bills with Israeli utility firms.
Diplomats have urged Israel to relent, warning that this decision will make an already fragile situation much worse.
The cash is badly needed to pay public salaries, including the wages of the West Bank's Western-trained security forces, which has been cooperating quietly with Israel for the past five years, helping reduce the inevitable frictions.
On Dec. 14, local police in their distinctive blue fatigues intervened in Hebron to stop Hamas supporters from clashing with Israeli soldiers stationed in the heart of the city, bringing a hail of stones down upon their heads. Deprived of pay, their willingness to act as a vital buffer might shrivel.
"The lack of political (peace) projects together with financial restraints is an explosive combination," said Ghassan Khatib, a former spokesman for Prime Minister Salam Fayyad who now lectures in contemporary Arab studies at Birzeit University.
"The general trend in opinion polls is that people are not so interested in violence, but the Gaza conflict and the settler problem is radicalising people," he added.
A survey released by Palestinian researchers at the Jerusalem Media and Communications Centre in February showed 29.3 percent of Palestinians backed "military operations" against Israel, down from a peak of 84.6 percent in 2001.
Some 72 percent of those questioned in the annual poll said economic considerations and the political situation were the most important factors in deciding if they supported violence.
Direct peace talks between Israel and the Palestinians broke down in 2010 because of continued Jewish settlement building in the West Bank and East Jerusalem. Some 500,000 Israelis live on land captured in 1967 and the number is growing every year.
In another act of retaliation after the U.N. vote, Israel announced it would build some 3,000 new settler homes, while officials in Jerusalem this week pushed ahead with plans for the construction of more than 6,800 homes for settlers.
Although most countries deem the settlements illegal, Israel rejects this, claiming biblical and historical ties to the land.
The Palestinians are refusing to return to the negotiating table until the building stops. Israeli Prime Minister Benjamin Netanyahu has rejected this, saying that just as in the past, there should be no preconditions for talks.
Israeli critics accuse Netanyahu of dragging his feet and say inaction will lead to disaster. "If we do not see a (peace) accord in this coming period, we will see a third Intifada," said Shaul Mofaz, head of the opposition Kadima party.
Buoyed by international condemnation of the settlements, the Palestinians say the time has come to increase the pressure.
"Unless we increase the cost of the occupation, I do not think that Israel will be in a position to withdraw from the Palestinian Territories," Mohammed Shtayyeh, a leading member of Abbas's Fatah party, told Reuters.
"The Palestinians should be engaged in massive popular, peaceful resistance," he said.
Just how to raise the cost of occupation lies at the heart of the unresolved dispute between Fatah, which dominates the West Bank, and Hamas, which governs Gaza.
The two groups, which fought a civil war in 2007, say they are now committed to unity, but gaping differences remain.
While Hamas is committed to armed resistance and has refused to renounce an inch of modern-day Israel, although it has said it would consider a long-term truce with the Jewish state, Fatah says it is ready to accept a state along 1967 lines. It believes diplomatic pressure and non-violent confrontation can win out.
In this vein, it is considering joining a welter of global bodies following its U.N. upgrade, including the International Criminal Court in the Hague, which it could use to pursue Israel for alleged war crimes tied to the settlement movement.
Such a move could pose a trickier challenge to Israel than a renewed uprising, with the hi-tech army well versed in dealing with the West Bank's 2.5 million Palestinians. However, senior officers say they are taking nothing for granted.
"Our forces must increase their alertness and maintain their operational preparedness, at all levels," Major General Nitzan Alon, who heads the military Central Command that oversees West Bank operations, told his troops on Dec. 11.