(Adds U.S. diplomacy on Syria)
TEL AVIV, March 12 (Reuters) - Benjamin Netanyahu will likely shelve recently revived Israeli peace talks with Syria given its territorial demands and alliance with Iran, a senior adviser to Israel's prime minister-designate said on Thursday. Uzi Arad helped Netanyahu when he was premier in 1996-1999 to craft indirect contacts with Damascus and is widely considered to be his choice for national security adviser.
He suggested Israel's new regional priorities may make negotiating with the Palestinians more viable than with Syria.
Outgoing Prime Minister Ehud Olmert's Turkish-mediated indirect talks with Syria were greeted cooly by Netanyahu, whose right-wing Likud party must form a new government after a Feb. 10 election.
The new United States' administration is keen to encourage peace contacts between Syria and Israel. Two senior U.S. officials made a rare visit to Syria last week in a sign of warming ties between Washington and Damascus and Secretary of State Hillary Clinton said: "The importance of this track, the peace effort, cannot be overstated."
Arad cited Syria's insistence on the return of the Golan Heights, which the Israelis captured in a 1967 war. Olmert, a centrist, had hinted a Golan withdrawal was among "difficult concessions" his government would be willing to countenance.
Syria rejected Olmert's demand that it distance itself from Iran, whose nuclear programme alarms Israel, as well as from the hardline Islamist groups, Hezbollah in Lebanon and Hamas in the Gaza Strip.
"No one in his right mind would do a deal with Syria, let alone do the concessions that Mr. Olmert alluded to, if it remained aligned with Iran. It would just bring Iran closer to us," Arad told Reuters. "It would be insane."
Arad saw no change in Likud's view that Israel should keep the Golan, annexed in a move not recognised internationally.
Previous Likud prime ministers who engaged Syria "all had different conditions which required that Israel remain on the Golan for a number of reasons -- strategic, population, early warning, protection of water sources -- and was not willing to withdraw from the Golan in its entirety", he said.
Israeli media have speculated that Netanyahu, perhaps under U.S. prodding for a diplomatic breakthrough after years of meagre talks with the Palestinians, might propose stop-gap deals like the Syrians leasing out the Golan to Israel, or regaining control of some of the plateau's Druze Arab villages.
Arad said such ideas could be part of a "creative" new strategy but Israel would still insist on Syria's realignment. With that prospect dim, he said Netanyahu might focus on improving the Palestinian economy and security in the occupied West Bank -- a policy many Palestinians scorn as a degraded form of their hoped-for talks on founding a state.
Netanyahu may see "no meeting ground between Israeli strategic and defence aspects...and what the Syrians are currently ready to bring to the table", Arad said.
"Whereas on the Palestinian track he does believe that in certain areas we can accomplish, very rapidly, much progress on the ground in the West Bank." He played down the possibility of the Obama administration impressing its impatience on the Netanyahu government.
"Let's put aside things like pressure ... That is not the practice among allies and friends. Differences exist."
Arad said the schism in the Palestinian polity between President Mahmoud Abbas, who favours coexistence with Israel, and Hamas, which controls Gaza and rejects peace talks, required a rethink of the U.S.-led vision for diplomatic engagement. He dismissed calls for Israel and its allies to reconsider their refusal to talk to Hamas until it softens its policies.
"Its culture is extermist, is radical, is hostile, denies Israel's right to exist, and it belongs more in the camp of the Taliban and al Qaeda and the Moslem Brotherhoods of the world, all of which are very, very uncompromising. What can we do?"
Netanyahu has urged the toppling of Hamas, against which Israel waged a three-week war in January, but this was more a response to Palestinian cross-border rocket salvoes than "an intent or an objective in itself", Arad believed.
Western interest in advancing Israeli-Arab peace could best be served by curbing Iran's nuclear programme, he said.
Israel, which is assumed to have the Middle East's only atomic arsenal, has endorsed U.S.-led efforts to use sanctions to get Tehran to abandon uranium enrichment, a process that can produce bombs though the Iranians deny having any such intent. "The more Iran becomes strong, the closer it gets to nuclear weapons, the more terrified the moderates in the Arab world and the Palestinian people become, and the more emboldened the radicals and the extremists are," Arad said. "So whichever way you look at it the order of priority is: blunt Iran first, move vigorously on peace after, and based on that. Should you act in the wrong order...you will have a sterile, perhaps failed process with the Palestinians and at the same time you will end up with a nuclear Iran."
Editing by Douglas Hamilton and Angus MacSwan
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