By Allyn Fisher-Ilan JERUSALEM, July 4 (Reuters) - Israel believes an Arab peace initiative is on hold because of Saudi objections to Western efforts to isolate Hamas Islamists, officials said on Wednesday. The 2002 plan promoted by Saudi Arabia and revived in March, offers Israel normal relations with Arab states in exchange for its withdrawal from all territory captured in the 1967 Middle East war. Although Israel has said it could never consider, on security and demographic grounds, a return of Palestinian refugees or a full pullout from the occupied West Bank, Prime Minister Ehud Olmert has pointed to what he termed positive aspects of the proposal. The initiative "is on hold, nobody is advancing it," one of the Israeli officials said. The officials said some Arab countries, notably Saudi Arabia, opposed U.S.-supported efforts to isolate Hamas following its defeat of President Mahmoud Abbas's Fatah group in Gaza last month. An analysis circulated among Israeli Foreign Ministry officials and obtained by Reuters said Saudi Arabia "had distanced itself from direct involvement in the Palestinian issue". In remarks to Reuters in Riyadh, Saudi political commentator Adel al-Harbi, an editor at the semi-official al-Riyadh daily, disputed Israel's assessment of the peace plan's status. "Saudi Arabia cannot say the initiative has ended," Harbi said, adding that the issue topped King Abdullah's agenda during talks in Europe last month. The Israeli analysis said the Saudis, who brokered a deal in March for a Hamas-Fatah unity government, were worried the friction between the two Palestinian groups that went to war in Gaza could strengthen Iranian influence in the territory. "In our estimation this is not a temporary pattern but rather a policy that will continue to characterise Saudi policy towards the Palestinians for the foreseeable future," the document said. Harbi said King Abdullah was trying "to get the Palestinian factions to come together in a unity government" again, due to his objections to the political split between Gaza and the West Bank, where Fatah holds sway. "Saudi Arabia is against the idea of two authorities, one in Gaza and one in Ramallah ... that's not Saudi Arabia's policy," Harbi said. (Additional reporting by Andrew Hammond in Riyadh)
