The West Bank scene is all too familiar: yellow cranes lifting boulders, bulldozers scooping up soil, drills transforming a hillside set in a biblical landscape of rolling olive groves.

But this is not another Jewish settlement under construction. Small Palestinian flags wave from the bulldozers, a hint that this is a nationally significant project, the start of the first planned city in modern Palestinian history.

"You are walking in downtown Rawabi," says site manager Maher Sawalha, burly and enthusiastic. Around him is empty brushland, dotted with hyssop and speckled with red anemones. But Mr Sawalha is not indulging in a fantasy: preliminary construction work on the town started last week, and it has a very detailed plan.

But there is a hitch: Israel has yet to grant permission to build an access road, without which this town, intended to have a population of 40,000, will simply not be viable. But, for the time being, that does not stop the dream from being dreamed. "Where we are standing there will be retail stores, hotels, a cultural centre, restaurants, a theater and a cinema," says Mr Sawalha. "In another part of the city we will also have an open-air theatre ."

This is the man who oversaw the building of the mausoleum of the Palestinian founding father, Yasser Arafat, in Ramallah, but he is convinced that Rawabi, 10 kilometres north of Ramallah and close to the Palestinian village of Atara and the Jewish settlement of Ateret, is more significant.

While Israel has altered the West Bank beyond recognition since the occupation began in 1967, this is the first time Palestinians have taken matters into their own hands and tried to change the map. The Palestinian Authority is strongly backing the project. "It is very important for the Palestinians because we have a housing shortage and very high demand on housing that the cities are not capable of dealing with," says spokesman Ghassan Khatib.

Rawabi is intended as a demonstration of how the Palestinians can take action – although peace efforts are stalled – to begin building their future state. And Rawabi will have Palestinian characteristics, says Bashar Masri, managing director of the Bayti Real Estate and Investment Company, which is overseeing the development. "It will have a lot of Western components and a lot of Palestinian components," he says. "Pushing a purely Western town will not sell here."

Mr Masri, whose company is Qatari- and Palestinian-owned, is himself a mixture of Western and local, a Nablus native who speaks with an American accent. "We are for profit, that's for sure," he admits. "But taking the risk is motivated by the fact that I'm Palestinian and we need to build this nation." Most residents will be middle- income, he says. Every residential building will have underground parking, not the norm for Palestinians, and in contrast to the sprawl of Ramallah, everything in from kindergartens to electricity will be meticulously planned.

But the town centre's design will evoke the old city cores of Jerusalem and Nablus, with narrow alleys made of stone or brick, for pedestrians only. The town will be divided into 23 neighborhoods that will feature "semi-private pocket gardens" so that residents will meet, and relationships will be forged and reinforced, says Shireen Nazer, a project architect. It is a feature in keeping with the Palestinian concept of the hara, or neighbourhood, where everyone knows each other.

But the project is very much at the mercy of the Israeli authorities. Despite an easing of checkpoints since Benjamin Netanyahu took office last spring, Israel remains unwilling to allow the growth of some key projects.

Security is clearly not the reason. The second Palestinian mobile phone operator, Wataniya, has been waiting for more than two years for Israel to grant the frequencies it needs to expand. Palestinian officials say they have been waiting 18 months for Israel to approve the paving of three kilometres of road for Rawabi that would cut through territory still under Israeli control.

Despite Mr Masri's optimism, he is realistic about the most basic need. If the access road is not built, he says, at some point a decision will be taken to scrap the town. "It would be stupid to continue until it is totally completed if the road is not approved," he says.