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ANALYSIS-EU tries to coax Palestinians back to talks

* EU trying to get stalled Middle East talks started again

* Seeks to assure Palestinians of an honourable outcome

* Israel worked to head off tougher EU wording

JERUSALEM, Dec 9 (Reuters) - You can lead a horse to water, but you can't make it drink.

The 27-member European Union this week went as far as it diplomatically dared to encourage the Palestinians to resume peace talks with Israel that have been suspended for a year.

It has managed to whip up some hope in the Palestinian camp, without provoking hostility from Israel. But it is not yet clear whether the EU initiative is enough to end the deadlock and get the negotiations rolling again.

Official Palestinian reaction ranged from cool, on the part of President Mahmoud Abbas, to warm on the part of Prime Minister Salam Fayyad. Chief Palestinian peace negotiator Saeb Erekat's response is somewhere in between.

The United States' bid to get talks relaunched by persuading Israel to order a moratorium on West Bank settlement building late last month has had no visible effect. The Palestinians rejected this partial freeze out of hand.

The EU took a different tack, addressing Palestinian demands that the goal of peace talks be clear before they sit down again -- to see if Israel is ready to accept a viable Palestinian state or only a "Mickey Mouse" republic, as Fayyad puts it.

On Tuesday, EU foreign ministers issued a general statement on the conflict, which reaffirmed their belief that Jerusalem must become a shared capital in any "two-state solution" deal to create a Palestinian state alongside Israel.

"It was the hope that this statement would give support to the Palestinians to resume negotiations, that was an ambition," said an EU official. "There were elements in the statement that were encouraging to both parties."

PRE-EMPTIVE STRIKE

Armed with a leaked copy of a draft statement by Sweden which would have gone much further to endorse the Palestinian claim to East Jerusalem, Israel mounted a pre-emptive diplomatic bid last week to banish the proposed tougher language.

"I think that for us the result is good," said Israeli Foreign Minister Avigdor Lieberman on Wednesday. Sweden had "tried to steal the show" but other EU states stopped it.

EU member Germany in Brussels explained that it could not have endorsed a statement that would impose the shape of a Palestinian state, explicitly naming an East Jerusalem capital.

In fact, the EU official said, "the Swedes always knew their proposal was going to be watered down" and played accordingly.

If that is the case, their diplomatic manoeuvre certainly got the attention of both parties in the Middle East conflict, and neither side is claiming it got all it wanted.

"We all know the Swedish draft was a good draft because it put in clear-cut terms the issue of East Jerusalem," Abbas said on Wednesday. "Then came the final, vague form..."

It was "an important decision", but not the one Sweden had proposed and "that we were satisfied with", he said.

Fayyad called it a good day "for international legitimacy, for justice and for our own people to begin to have a sense of hope".

Chief Palestinian negotiator Saeb Erekat, who recently said the peace process was as good as dead, was also positive.

"The EU has released a basic blueprint for the resumption of meaningful negotiations. If these principles are translated into reality, negotiations should resume starting from where they left off at Annapolis (in 2007)," he said.

A BLUEPRINT TO RESTART?

Israeli Prime Minister Benjamin Netanyahu has said many times that Jerusalem is and will remain the "undivided" capital of the Jewish state. He categorically rejects the idea of a Palestinian capital in the eastern half of the city.

Italian Foreign Minister Franco Frattini, in the West Bank to see Fayyad, said he would meet Netanyahu later "and I will tell him that Europe and the United States expect Israel is ready to come back to the negotiating table. The same I would expect of course from the Palestinian side."

So what are the prospects now of movement?

Western diplomats were watching Palestinian reaction over the next week. The Palestine Liberation Organisation, which Abbas leads, is due to meet Dec 15 and was likely to endorse whatever the 74-year-old leader decides on this crunch issue.

Palestinian political analyst Nadir Saeed said the timing of the EU statement "had great importance, and the initiative in and of itself was important because it came at a point when the Palestinian situation is weak and divided".

"There's nothing new in the EU position ...the only thing that's changed is the increasing pressure on Abbas from the Europeans to return to negotiations without the condition of a settlement freeze," he said.

Analyst George Giacaman of the West Bank's Birzeit University said the EU statement was a step forward but "completely insufficient" for Abbas to resume talks with Israel. (Reporting by Luke Baker in Brussels, Erika Solomon, Mohammed Asssadi and Tom Perry in Ramallah, Yasmine Saleh and Edmund Blair in Egypt, Allyn Fisher-Ilan and Douglas Hamilton in Jerusalem; writing by Douglas Hamilton; Editing by Charles Dick)

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