* Deputy minister says Israeli sovereignty at stake
* Sides to meet Wednesday, in parallel to peace talks (Adds details on research programme, meetings)
By Dan Williams
JERUSALEM, Aug 9 (Reuters) - Israel appealed to the European Union on Friday to rethink plans to withhold funds from Israeli organisations in the occupied territories, a shift in tone from earlier recrimination and retaliation.
Under guidelines adopted by the executive European Commission in June, Israeli "entities" operating in the West Bank and East Jerusalem will not be eligible for EU grants, prizes or loans from next year.
The move was welcomed by Palestinians, who seek statehood in those territories, and deplored by Israel, which has settled the West Bank extensively and considers all of Jerusalem its undivided capital - a status not recognised internationally.
The rightist Israeli government responded on July 26 by announcing curbs on EU aid projects for thousands of West Bank Palestinians. On Thursday it accused the Europeans of harming Israeli-Palestinian peace efforts and said it would not sign new deals with the 28-nation bloc given the planned EU cuts.
But Deputy Israeli Foreign Minister Zeev Elkin took a more diplomatic tack on Friday, offering to negotiate with the European Union over the guidelines, which he described as a challenge to the Jewish state's sovereignty.
"We are ready to hold a creative dialogue with the Europeans. We understand their position. We reject it, we don't like it, but it's their right when it comes to using their money," Elkin told Israel Radio.
"We are asking the Europeans also to take into consideration the legal and other problems this creates on the Israeli side. We want to return and are ready to negotiate. But if the terms are the way they are today - unprecedented and several steps beyond anything heretofore - then we won't be able to do it."
EU foreign policy chief Catherine Ashton's spokesman Michael Mann said Brussels was willing to clarify the new guidelines in talks with Israel.
"We stand ready to organise discussions during which such clarifications can be provided and look forward to continued successful EU-Israel cooperation, including in the area of scientific cooperation," Mann said in a statement to Reuters.
Another EU official said the first round of those talks would take place on Wednesday in Tel Aviv. They will focus on Horizon 2020, a prestigious 80-billion-uro ($107-billion)research programme in which Israel is expected to participate, contributing some funding while receiving grants in return.
The row with Brussels has stirred worry among Israeli scientists and academics that they could be cut from the programme. Elkin echoed their concern, but said the potential loss was in terms of research achievements, rather than money.
"The financial aspect is certainly not billions of euros. It's not even 1 billion," he said, adding that past Israeli contributions to such projects had made them profitable, with "returns of around 1.3 euros for every euro invested".
The EU move surfaced as U.S. Secretary of State John Kerry brokered a resumption of Israeli-Palestinian peace talks that had been frozen for nearly three years. The settlements remain a major subject of dispute in the negotiations, the next round of which is due to take place on Wednesday in Jerusalem.
Some 500,000 Israelis live in the West Bank and East Jerusalem among 2.5 million Palestinians. Israel captured those territories, along with the Palestinian Gaza Strip and Syrian Golan Heights, in the 1967 war. It quit Gaza in 2005 but has annexed the Golan - another territory affected by the EU move.
Most world powers deem the settlements illegal.
Elkin said the EU guidelines required Israel to take action against its own institutes with facilities in East Jerusalem.
"The dispute here is about Jerusalem and the dispute is over the question over whether the sovereign border that we laid down is in force or not," he said. "If you begin to discriminate among various bodies located within your sovereign territory, it means you are effectively denying the sovereignty you declared." ($1 = 0.7490 euros) (Writing by Dan Williams; Editing by Paul Taylor and Michael Roddy)