By Patrick Worsnip UNITED NATIONS, Aug 29 (Reuters) - U.N. Middle East envoy Michael Williams expressed "guarded optimism" on Wednesday about prospects for peace in the region because of growing Palestinian-Israeli dialogue and international involvement. But Williams, in a final report to the Security Council before leaving his job after just three months, said both diplomatic and practical measures needed to be kept up to stop a renewed peace process from running out of steam. Following a visit to the region, "I returned guardedly optimistic, but conscious of many challenges ahead," he said. Williams, a Briton, said a "substantive dialogue" developing between Palestinian President Mahmoud Abbas and Israeli Prime Minister Ehud Olmert and reform efforts by a new Palestinian government had "created growing expectations." Abbas and Olmert met most recently on Tuesday. The naming of former British Prime Minister Tony Blair as an international Middle East envoy, more active regional diplomacy and preparations for a U.S.-sponsored conference in November on Palestinian statehood have helped, he said. The attempted relaunch of the peace process has been a paradoxical result of the takeover of the Gaza Strip by the Palestinian militant group Hamas from Abbas' forces in June. Though the split has been widely deplored by Arab states and the United Nations, it enabled Abbas to fire the former Hamas-led Palestinian government, establish control in the West Bank and re-establish dialogue with Israel and the West. But, Williams said, "The diplomatic process will need to be carefully monitored and supported, and must be buttressed by urgent and meaningful steps on the ground, if the many factors that could derail efforts are to be overcome." He said Israel needed to ease restrictions on movement in the West Bank and end incursions there, while the Palestinian Authority needed to deploy "credible security personnel" on the streets of West Bank cities. He also said Israel should start to curb continuing Jewish settlement activity in the West Bank that he said "undermines hopes for a contiguous Palestinian state." Williams said peace talks had to "shift gear, to achieve concrete agreements on permanent status issues and steps of implementation" -- a task he said was not easy but "can be achieved." "We cannot afford a new failure in the efforts to revive the Arab-Israeli peace process," Williams said. "There is hope now which has been absent for almost seven years. A setback at this stage could have serious consequences." Williams, who succeeded Peruvian Alvaro de Soto in the U.N. job in May, has accepted a post as British Middle East envoy with the new government of Prime Minister Gordon Brown. No replacement has yet been named.
