* Abbas says does not seek re-election, rules out bargaining
* Says "surprised" by U.S. "favouring" Israel on settlement
* Clinton says discussed Abbas's future with him
(Adds U.S. comment, Abbas, Abu Rdainah quotes)
By Mohammed Assadi and Tom Perry
RAMALLAH, West Bank, Nov 5 (Reuters) - Palestinian President Mahmoud Abbas said on Thursday he did not wish to run for re-election in January, voicing disappointment at Washington for "favouring" Israel in arguments over re-launching peace talks.
The 74-year-old PLO leader, in a televised speech, said his decision was not the negotiating tactic some had expected of him. But his phrasing did appear to leave some room for a change of heart. Officials to whom he announced his move earlier in the day said they insisted he must stand as they had no one else.
U.S. Secretary of State Hillary Clinton said she looked forward to working with Abbas in "any new capacity", adding she had discussed his political future in a meeting with him last weekend. She did not give any details.
State Department spokesman Ian Kelly, asked whether the United States wanted Abbas to change his mind, said: "It's not up to us to say whether or not he should change his mind."
In a mark of the frustration aides say he has felt since Clinton agreed with Israel last week that settlement expansion should not hold up a return to talks, Abbas praised President Barack Obama's administration for promoting peace. But he added: "We were surprised by their favouring the Israeli position."
A man who has based his political career on peace talks, Abbas said he still believed it was possible to reach a solution in which a Palestinian state would arise alongside Israel. But the two-state vision currently faced "many dangers", he said.
Abbas aide Nabil Abu Rdainah, explaining Abbas's announcement, said: "The peace process is heading towards a dead end and the American administration failed to make Israel abide by international demands."
Abbas called the Jan. 24 presidential and parliamentary elections last month in a move rejected by his Islamist rivals Hamas, which contests his legitimacy and opposes U.S.-led moves towards permanent Palestinian coexistence with the Jewish state.
He called the vote after failing to conclude an Egyptian-brokered deal to end a deep political schism with Hamas, which seized control of the Gaza Strip in 2007, splintering the Palestinian national movement.
"I have told our brethren in the PLO (Palestine Liberation Organisation) ... that I have no desire to run in the forthcoming election," a visibly tense Abbas told a news conference at his Ramallah headquarters.
Earlier he had told the PLO's executive committee, not for the first time in recent years, that he did not want to stand again. The committee, however, had rejected his offer.
SLAMS HAMAS, ISRAEL
Abbas, who replaced the late Yasser Arafat five years ago, reserved some of his strongest condemnation for Hamas, who beat his long-dominant Fatah party in a 2006 parliamentary election.
He called on Hamas to review "its destructive practices against the national project". A spokesman for the group said Abbas's announcement was "a symbol of his failure after America and Israel used him as a tool."
Abbas also slammed Israel, whose Prime Minister Benjamin Netanyahu has rejected Abbas's demand that all building in Jewish settlements in the occupied West Bank must cease before peace negotiations can resume after an 11-month halt.
Israeli Defence Minister Ehud Barak said in a statement he hoped the announcement would not damage "efforts to launch negotiations and achieve a peace accord".
Abbas faces a dilemma: Washington insists he drop conditions for renewed peace talks with Israel, yet to abandon his demand for a freeze on West Bank settlements may further bolster Hamas.
"I think the aim is to get a strong American position that would define the terms of reference for the peace process and that is to establish a Palestinian state on the 1967 borders, without excluding Jerusalem," said George Giacaman, a political scientist at Birzeit University in the West Bank.
Aides have said privately in recent days that, despite talk of Abbas making a grand gesture not to seek a second term, he was unlikely to step down, since his Fatah party and the wider PLO, both of which Abbas heads, have no obvious replacement.
With the Palestinians so deeply divided, many analysts doubt there will be any vote at all. Should elections happen, they would lack legitimacy, they say. (Additional reporting by Ali Sawafta; writing by Alastair Macdonald and Tom Perry, editing by Tim Pearce)