* Negotiator deplored Israeli "dictates", U.S. complaisance
* Israel eyes wary of Palestinian political schism
(Adds Erekat and Netanyahu quotes, background)
RAMALLAH, West Bank, Nov 4 (Reuters) - Palestinians may have to abandon the goal of an independent state if Israel continues to expand Jewish settlements and the United States does not stop it, chief Palestinian negotiator Saeb Erekat said on Wednesday. It may be time for Palestinian President Mahmoud Abbas to "tell his people the truth, that with the continuation of settlement activities, the two-state solution is no longer an option", Erekat told a news conference.
Israel has rejected the idea of a de facto annexation of the occupied West Bank, incorporating the Palestinians as citizens, as "demographic timebomb" that would make Jews the minority.
Citing a 2003 peace "road map", Abbas has made a cessation of Israeli settlement activity in the West Bank a precondition for resuming statehood talks with Israel.
The road map also required that Palestinians dismantle armed groups like Islamist Hamas, which opposes peace talks. That did not happen, and Hamas now controls the Gaza Strip -- half the Palestinian polity -- in a running challenge to Abbas's mandate.
U.S. Secretary of State Hillary Clinton, who met Israeli and Palestinian leaders on Saturday, unsuccessfully urged Abbas to negotiate with Israel and resolve the settlement issue within the framework of the talks.
Erekat said Clinton -- who praised as unprecedented Netanyahu's offer to temporarily limit construction in West Bank settlements to 3,000 additional housing units -- was only opening the door to more settlements in the next two years.
The alternative left for Palestinians is to "refocus their attention on the one-state solution where Muslims, Christians and Jews can live as equals", Erekat said. "It is very serious. This is the moment of truth for us."
DICTATION VS NEGOTIATION
Erekat said Netanyahu's concept of a separate Palestinian state alongside Israel with limited powers of sovereignty and his uncompromising position on the future of Jerusalem were tantamount to dictating the terms of peace negotiations.
Netanyahu, Erekat said, told Abbas "that Jerusalem will be the eternal and united capital of Israel, that refugees won't be discussed, that our state will be demilitarised, that we have to recognise the Jewish state, that it's not going to be the 1967 borders, that the skies will be under his control" .
"This is dictation and not negotiations," he said.
Netanyahu and Abbas last met in New York in September in a handshake meeting arranged by U.S. President Barack Obama.
Palestinians seek to establish their future state on all of the West Bank and Gaza, lands captured from Jordan and Egypt in a 1967 war, with East Jerusalem as its capital. "Anything short of that is a non-option for us," Erekat said.
"If the Israelis believe they want to partition the West Bank with us, this is a no-go. This is a non-starter," Erekat said, in reference to Israeli control of West Bank settlements, adjacent land, and the territory's eastern Jordan Valley border.
Clinton reaffirmed in Cairo on Wednesday that Washington does not accept the legitimacy of the Israeli settlements.
But she added, in another nudge to Palestinians to talk with Israel: "Getting into final status negotiations will allow us to bring an end to settlement activity."
Erekat said Palestinians "made a mistake" in the past by agreeing to negotiate with Israel without insisting on a settlement halt, and they were not about to repeat that error.
In a statement, Netanyahu said Israel's aim remained the quick resumption of peace talks. But he also deplored the split between Hamas and Abbas's secular Fatah faction, which has widened over the president's disputed call for a Jan. 24 ballot.
"The possibility that Palestinian election might be held soon is causing a polarization of Palestinian Authority positions regarding Israel and is hindering the opening of negotiations," Netanyahu's office quoted him as saying.
Writing by Douglas Hamilton
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