BRUSSELS, Aug 5 (Reuters) - The European Union is working to build its credentials as a Middle East power broker but its efforts are complicated by internal divisions over Palestinian plans to seek UN recognition of a Palestinian state.

The paralysis in the Israeli-Palestinian peace process has encouraged EU foreign policy chief Catherine Ashton to try to play more of a leading role, in the absence of any initiative by Washington.

The British diplomat has tried to reactivate the Middle East Quartet as a negotiating body, and has emphasised the EU's ability to be more flexible than U.S. mediators when it comes to persuading the two sides to resume peace talks.

Europe's leverage in the region is limited, its aid to the Palestinians far outweighed by Washington's economic and military support for Israel, but Ashton's long-term aim is to position Europe as the more adaptable mediator.

Her big challenge is persuading Israel to take the European Union seriously as a lead mediator. But the outlook is so poor that this may be the best time for an EU push, many observers say.

"The EU has historically played second fiddle because the two main actors, the Palestinians and the Israelis, made it their priority to court the Americans," said Robert Blecher of the International Crisis Group.

"That made it more difficult for the EU to get involved. But there is growing Palestinian disenchantment with the U.S. that opens the door to Europe. What the Europeans have to bring to the table is that they are not the United States."

Ashton still has to convince Israel the EU is a balanced broker: its close ties with the Palestinians are an obstacle in the eyes of the Israelis.

Between EU institutions and member states, Europe is the biggest aid donor to the Palestinians, providing about 1 billion euros ($1.41 billion) annually between 2007 and 2010 and participating closely in Palestinian state-building efforts.

Israel, however, receives around $3 billion a year in military and other aid from Washington, its closest ally, a total of some $100 billion in nearly four decades.

OFFERING ALTERNATIVES

In the short term, Ashton's hopes may be dashed if West Bank Palestinian leaders go ahead with a plan to request a vote on statehood at the next U.N. General Assembly gathering.

The plan, opposed by Israel and Washington and dismissed as hot air by Hamas, would complicate efforts to revive peace talks and expose gaping policy differences among EU states -- undermining Ashton's drive to strengthen the EU's voice abroad.

Forced to choose at the U.N. General Assembly, the 27 EU states may split into two camps. Outright backing for Palestinian statehood by big EU powers such as France could also antagonise Israel.

"The Quartet is a way for Ashton to head off embarrassment at having the veil pulled away from her attempt to forge a common foreign policy," Blecher said.

A return to peace negotiations -- overseen for decades by Washington -- looks most unlikely, the Palestinian leadership refusing to budge until Israel freezes housing construction in the occupied West Bank, which it refuses to do.

But observers say the EU may have fewer domestic policy constraints than Washington in formulating a position, giving it more room for manoeuvre in trying to push the two sides closer.

U.S. President Barack Obama has had rocky relations with Israel since taking office, partly because of his push against settlements, and he can do little to pressure Israel because of criticism from the Republican-controlled U.S. Congress.

"The Europeans can call for certain policy shifts which, for the moment, the Americans can't," said Clara O'Donnell of the Centre for European Reform in London.

The Quartet's last meeting, in Washington in July, ended with no breakthrough, and diplomats said the four mediators -- the EU, United States, Russia and the U.N. -- failed to bridge gaps between the two sides.

Disagreements centred on whether Israel can be defined as a "Jewish" state under future deals, on the approach to Israeli settlements in occupied Palestinian territories and on ties with Hamas, the Islamist group that runs Gaza and is listed as a terrorist organisation by the West.

The EU is more receptive than Washington to talking with Hamas -- which is struggling to cobble together a unity government with the Fatah movement of Palestinian President Mahmoud Abbas -- and has pushed for stronger criticism of continued Israeli construction in the West Bank.

"The official EU position regarding engagement with the Palestinian unity government is much more compromising than the U.S. position and there seems to be a tacit involvement from the Obama administration to encourage the Europeans to do it," said O'Donnell.

The Palestinians have yet to decide what course to take at the U.N. meeting in September. One option is to seek full U.N. membership for a state of Palestine alongside Israel, though the United States would probably block this.

They could seek a vote on a resolution spelling out their aspirations that would garner varying degrees of EU support.

As EU governments prepare for the UN General Assembly meeting, Britain has said it is not ready to decide on the Palestinian issue, while France has spoken more critically against U.S. arguments during Quartet discussions.

Several eastern European states, on the other hand, have been more receptive to Israeli concerns over any U.N. vote.

"We are still working with the Quartet to see whether we can pull together a statement. It's not easy, because the purpose of the statement is to get talks going so it needs to be very inclusive," Ashton said in Brussels recently.