ANALYSIS-"Jewish State" Demand Complicates Intricate Equation

* Netanyahu throws "Jewish state" demand into heart of talks

* Palestinians recoil; Washington supports basic premise

* Issue has risen to fore in recent years, won't go away

By Dan Williams

JERUSALEM, Oct 13 (Reuters) - On the Middle East carousel of claims, recrimination and evasion, Prime Minister Benjamin Netanyahu's call on Palestinians to recognise Israel as a Jewish state could be seen as yet more spin.

Floated anew by the right-wing leader on Monday, this time as a condition for Israel extending a West Bank settlement freeze so that peace negotiations might resume, the demand was immediately rejected by Palestinian President Mahmoud Abbas.

Abbas already accepts coexistence with Israel and should not be expected to endorse its internal constitution, his aides say; and Israel never set such terms for peace with Egypt and Jordan.

The fact Netanyahu, under U.S. pressure for a breakthrough, now seeks to win a core Palestinian concession in exchange for a bureaucratic gesture like another temporary curb on settlement housing starts has many Israeli pundits sharing the scepticism.

Critics accuse the prime minister of indulging in right-wing demagogy and say his move was a hapless attempt at trying to shift the blame for the talks stalemate onto the Palestinians by seeking something he knew the other side would never accept.

But the recognition demand is not a Netanyahu invention.

It was raised as a core Israeli concern by his predecessor Ehud Olmert, who is considered a political moderate. Netanyahu has promoted it as cutting to the heart of the six-decade-old Middle East conflict.

The prime minister's allies say the question is crucial in how to divide the land for two separate populations, with the Jews seeking acceptance across the Arab world as a distinctive people with national rights to an historic homeland.

Abbas's rejection of the demand "raises a red flag", Deputy Israeli Prime Minister Moshe Yaalon said on Tuesday.

"It is not because of (West Bank) settlement that there is no peace. It is because of the unwillingness of the Arab Palestinian leaderships to arrive even at a partition of the land, since the dawn of Zionism," Yaalon told Army Radio.

WASHINGTON SYMPATHETIC TO ISRAELI CONCERN

While the United States has not endorsed Netanyahu's recognition gambit at this stage of the negotiations, U.S. President Barack Obama's administration acknowledges the issue is a cornerstone of his policy on peace with the Palestinians.

"We have recognised the special nature of the Israeli state. It is a state for the Jewish people," U.S. State Department spokesman P.J. Crowley told reporters in Washington on Tuesday.

"What Prime Minister Netanyahu said (on Monday) is, in essence ... a core demand of the Israeli Government, which we support," he added, stopping short of calling on the Palestinians to accept it.

But U.S. backing for Israel's vision of itself does not mean the Palestinians will embrace the idea -- far from it.

Having lost Gaza to Islamist group Hamas in 2007, and governing in a West Bank crowded by Israeli settlements, Abbas is hard-put to stake out a viable Palestinian nation-state.

Already derided by Hamas and other rivals as a supplicant negotiator, Abbas would risk losing his remaining credibility amongst Palestinians if he bowed to Netanyahu's terms.

The Palestinian leadership argues that recognition of "a Jewish state" would compromise the status of Israel's 20-percent Arab minority -- even though Israel's 1948 Declaration of Independence guarantees full civil rights for all its citizens.

Such a move would also effectively forgo the right of return to Israel of Palestinian refugees who fled or were forced from their homes in Arab-Israeli wars, Palestinian officials say.

POPULATION ANXIETY

Netanyahu made his demand a day after his cabinet approved a controversial measure that would force non-Jewish candidates for naturalisation to take a loyalty oath to Israel as a Jewish and democratic state before they could gain citizenship.

That move raised liberal hackles in a mostly secular Israel where there is seldom agreement on what Jewish statehood means.

The ferocious debate is being played out against genuine concern in Israel that demographics point to a steady decline in the Jewish majority within the country.

According to the Central Bureau of Statistics, Jews made up 75.5 percent of Israel's population in 2009 against 77.8 percent in 2000, 81.8 percent in 1990 and 83.7 percent in 1980.

Over that same period, Israel's Muslim population increased from 12.7 percent to 17.1 percent.

Such readings, and the concerns they engender among Israeli Jews, were bound to spill over into the peace talk arena sooner or later, adding yet another explosive issue into an already tense environment.

George Giacaman, a political scientist at Birzeit University in the West Bank, said the recognition stalemate could even be enough to push Abbas into considering dissolution of the limited self-rule Palestinians won under 1993 interim peace accords.

"If this is the last word, the political process will stall and the Palestinian leadership will be forced to look at alternatives," he said. "It's not encouraging." (Editing by Crispian Balmer and Janet McBride)