* EU wants Palestinians not to seek full U.N. membership
* EU's Ashton in Middle East before U.N. General Assembly (Adds Clinton quotes, U.S. Congress on aid, details)
By Justyna Pawlak
BRUSSELS, Sept 15 (Reuters) - - The European Union hopes to persuade Palestinian leaders to drop plans for full United Nations membership this month in return for a nuanced upgrading of their U.N. observer status, EU diplomats said on Thursday.
The EU's foreign policy chief, Catherine Ashton, went to the Middle East this week to mediate between Israel and the Palestinians with the aim of reviving peace talks and averting a Palestinian statehood bid at the U.N. General Assembly, which begins its annual gathering on Sept. 21.
The United States has warned that such an attempt would damage chances of reviving talks and sent envoys to the region this week to lobby the Palestinians.
Israel has also said any such move would put an end to negotiations, which were frozen a year ago in a dispute over Israeli settlement building in the occupied West Bank.
Israeli Prime Minister Benjamin Netanyahu said on Thursday he would address the United Nations next week and urge the Palestinians to negotiate peace with Israel rather than pursue the bid for full U.N. membership for a Palestinian state.
Diplomats said Ashton was trying to negotiate a package that could include a statement by the Quartet of Middle East negotiators laying out guidelines for future talks between the Israelis and Palestinians.
In Brussels, diplomats said her proposal included a text that would not rule out full U.N. membership for a Palestinian state in the future but focuses for now on a lesser upgrade of their status coupled with a specific mention of talks.
"Our idea is to push for an upgrade of the Palestinian status without excluding full status in the future but with a reference to negotiations," one senior EU diplomat said.
It was not immediately clear whether this would be an upgrading to the status of "non-member state" observer, as held by the Vatican, or some other formulation.
The Palestinian Authority now has the status of an observer "entity."
The United States and Israel object to "non-member state" status for the Palestinians because this would let them take cases to the International Criminal Court and the International Court of Justice.
Among ideas under discussion, diplomats said, was giving the Palestinians "non-member state" status while limiting their ability to launch such legal challenges. Another possibility would be to offer them lower status but to give them some nods in the direction of statehood, including possible direct access to World Bank funding.
In San Francisco U.S. Secretary of State Hillary Clinton said on Thursday there was a "growing recognition" on the part of Israel and the Palestinians that the issues had to be settled in peace talks and that they "will not be resolved if some other route is taken at the United Nations." [ID:nS1E78E1WV] [ID:nS1E78E01M]
The U.S. Congress has threatened to cut the roughly $500 million in annual U.S. aid to the Palestinians, but Israel on Thursday urged the international community to maintain assistance. [ID:nS1E78E1X5]
Palestinian President Mahmoud Abbas vowed on Wednesday "no retreat" from the plans to request full U.N. membership in the absence of talks with Israel.
In Ramallah, Abbas met U.S. Middle East envoy David Hale and senior White House official Dennis Ross, who are also in the region in an attempt to dissuade him from pursuing the U.N. path. But the meeting did not appear to make any progress towards resolving differences.
"The president informed the American delegation about the latest developments concerning going to United Nations to obtain full membership for the state of Palestine," the official Palestinian news agency WAFA reported.
At the United Nations, Palestinian representative Riyad Mansour told reporters the Palestinians were still "fine-tuning our options" on what to do next week.
"The final decision will be taken in the next few days as to which path we would follow, whether it is through the Security Council for full membership or whether through the General Assembly" for a lesser upgrade of status, he said.
Ashton has played an increasingly active role in the Quartet, which groups the EU, the United States, Russia and the United Nations, since becoming foreign policy chief in December 2009. But her efforts have been complicated by internal divisions in Europe over the Palestinian statehood bid.
Should Palestinian statehood be brought to a vote in the United Nations, the EU's 27 member states could split into three camps, with some opposing the bid, others backing it and several abstaining.
France, in particular, appears to be more receptive to the Palestinian arguments. Germany opposes unilateral declarations without a negotiated settlement between Israel and the Palestinians.
To succeed, Ashton would have to persuade U.S. diplomats to get on board. Washington has said if the Palestinians ignore entreaties and seek full membership status, it will use its veto in the U.N. Security Council.
In Jerusalem, a Netanyahu aide said the Israeli leader did not rule out talks with Abbas even if the Palestinian president presented the U.N. membership request as planned on Sept. 23.
The aide noted the General Assembly probably would not vote on such a membership upgrade resolution until early October, keeping the door open for a resumption of Israeli-Palestinian peace talks and a meeting between Netanyahu and Abbas.
Also on Thursday, a Palestinian official said an escalation in Jewish settler attacks on Palestinian villages in the Israeli-occupied West Bank risked triggering retaliation.
Palestinians fear more trouble in the days leading up to Sept. 23, when Abbas plans to take the step which amounts to an attempt to gain U.N. recognition of a state on land occupied by Israel in a 1967 war and to which many settlers stake a biblical claim. (Additional reporting by Jeffrey Heller in Jerusalem, Tom Perry in Ramallah, Arshad Mohammed in San Francisco and Patrick Worsnip at the United Nations; editing by Luke Baker, John O'Callaghan, and Jackie Frank)