(Adds McCain quote, paragraphs 10-11) By Matt Spetalnick WASHINGTON, Dec 6 (Reuters) - President George W. Bush must push for a comprehensive Arab-Israeli peace as part of a U.S. effort to defuse broader regional tensions, an elite panel on the Iraq war urged on Wednesday. Bush, who has mostly avoided a hands-on role in Middle East diplomacy, faced a call from the Iraq Study Group led by former Secretary of State James Baker for a "renewed and sustained commitment" to solving the festering Arab-Israeli conflict. Washington and its ally Israel have long rejected even a tenuous linkage between that dispute and the Iraq war. Arab leaders insist the issues are intertwined and that Israeli-Palestinian fighting has been a key source of regional strife. "The United States cannot achieve its goals in the Middle East unless it deals directly with the Arab-Israeli conflict and regional instability," the bipartisan commission said in its much-anticipated report to Bush. Although the group's report dealt mostly with proposed shifts of course in the unpopular war in Iraq, its key recommendations included a call for direct talks as soon as possible involving Israel, Lebanon, Syria and the Palestinians. It said such negotiations should be sponsored by the United States or the quartet of international mediators and follow a two-track approach like the 1991 Madrid peace conference. Israel would deal with the Lebanese and Syrians on one track and with the Palestinians on the other. The Israeli-Palestinian conflict has slipped down Bush's foreign policy agenda as he has grappled with the Iraq war and nuclear challenges from Iran and North Korea. Even last summer's Israel-Hezbollah war drew only a brief re-engagement. In the Arab world, commentators held out little hope Bush would reactivate peace efforts. Arab leaders voice frustration over what they see as Washington's bias in favor of Israel. Republican Sen. John McCain, a potential 2008 presidential candidate, was also skeptical about the prospect for talks. "An Israel-Palestine solution would be nice but let's remember that Palestine is controlled by a group dedicated to Israel's extinction," he told reporters. "It's very difficult for the two sides to negotiate based on that." The Palestinian Cabinet is dominated by the Islamist group Hamas. DEMANDS FOR SYRIA The Baker group said in its report, "The United States does its ally Israel no favors in avoiding direct involvement to solve the Arab-Israeli conflict." While calling for a resumption of long-stalled talks, the group said Syria must meet a list of international demands. It called for a halt to aid to Hezbollah and to the use of Syrian territory for transshipment of Iranian arms to the Lebanese guerrilla group, an allegation Tehran has denied. It also urged Syrian help to secure the release of Israeli soldiers held by Hezbollah and Hamas, an end to weapons shipments to Palestinian militant groups and a commitment to get Hamas to recognize Israel's right to exist. "In exchange for these actions and in the context of a full and secure peace agreement, the Israelis should return the Golan Heights, with a U.S. security guarantee for Israel that could include an international force on the border, including U.S. troops if requested by both parties," the group said. On the Palestinian front, the commission reasserted the principle of "land for peace" as the basis for a two-state solution and urged support for moderate Palestinian President Mahmoud Abbas taking the lead in preparing talks with Israel. Washington and Israel have rejected contacts with the Palestinians' Hamas-led government.
