* Western-backed government slams Israeli "assault"
* Anger unites Palestinian factions over Jerusalem
* Tension bodes ill for U.S. efforts to renew peace talks
(Adds Hamas leader, paragraphs 7-8)
By Alastair Macdonald
JERUSALEM, Sept 28 (Reuters) - Palestinians' Western-backed government hailed on Monday people who fought Israeli police in Jerusalem as defenders of a Muslim holy site, and accused Israelis of trying to wreck U.S.-sponsored peace talks.
A day after clashes in the Old City that injured about 30 people and had Palestinian leaders warning of a Third Intifada, or uprising, the statement from the cabinet of Prime Minister Salam Fayyad showed a degree of unity among Western-backed "moderates" and Islamist hardliners in aiming anger at Israel.
With U.S. President Barack Obama's peace envoy due to hold more talks this week to push for a resumption of negotiations between the Palestinian Authority and Israel, the fighting over the holy city at the heart of the conflict was not auspicious.
"The cabinet ... hailed our people who rushed yesterday to defend blessed al-Aqsa mosque and thwarted the attempt by extremist settlers to break into the compound," the Palestinian government said in the statement from its Ramallah headquarters.
Accounts of Sunday's incident around Islam's third holiest site varied. Israeli police said Muslim worshippers threw rocks at tourists. Palestinians said Jews from radical groups tried to enter to mark the eve of Judaism's holiest day, Yom Kippur.
Fayyad's government said the Israeli action was an attempt to forestall the outcome of negotiations on a peace agreement, a key element of which is control of Jerusalem. Israel captured the Old City with its holy sites along with the rest of Arab East Jerusalem and the West Bank in the war of 1967.
The language echoed condemnation by Hamas, the Islamist group which rejects peace deals with Israel and which controls the Gaza Strip in opposition to Palestinian President Mahmoud Abbas.
The group's Damascus-based leader, Khaled Meshaal, urged the government to end security cooperation with Israel and "activate the agenda of resistance which is the true response".
The United States and Europe should not "misread the current silence in Palestine", he said. "There is fire under the ashes".
On Sunday, Abbas's chief peace negotiator compared the incident with a visit to the same site around the Dome of the Rock by Ariel Sharon, a hawkish Israeli politician and later prime minister, nine years ago on Monday. That visit sparked violence that developed into the Second Intifada.
The government of Fayyad, a former World Bank technocrat viewed by Israel and its allies as a "moderate", said it "condemned the storming by Israeli police and special forces of the mosque compound and their assault on worshippers".
Mohammad Dahlan, a leader of the younger generation in Abbas's Fatah party, warned Israel it was "playing with fire".
"A Third Intifada may erupt...in reaction to the Israeli disrespect of the feelings of Muslims and the storming by extreme Jewish groups of the al-Aqsa mosque," Dahlan said.
In Sunday's incident police fired tear gas and stun grenades at hundreds of Palestinians who had gathered in anticipation of such a move by groups associated with Jewish settlers in the West Bank. Stones, chairs and other objects hit police.
Seventeen officers were hurt and Palestinian medics said they treated 13 civilians. Police said 11 people were detained.
Israeli Prime Minister Benjamin Netanyahu has rejected any discussion of Palestinian demands for at least a share of the city as their future capital. Israel calls Jerusalem its eternal and undivided capital, a position not endorsed internationally.
Since Netanyahu's right-wing coalition took power in March, Palestinians have complained of increasing actions to push Arabs out of East Jerusalem and to allow in Jewish settlers.
With the Jewish state shut down for Yom Kippur, the Day of Atonement, Israel's government made no comment on Sunday's violence. There was little sign of major trouble on Monday.
In Gaza, Islamist militants and the army reported exchanging fire near the border fence. Two Palestinian youths were wounded.
(Reporting by Mohammed Assadi in Ramallah, Nidal al-Mughrabi in Gaza and Ori Lewis and Douglas Hamilton in Jerusalem; editing by David Stamp)
(For blogs and links on Israeli politics and other Israeli and Palestinian news, go to blogs.reuters.com/axismundi)