INTERVIEW - Muslims watching U.S. with guarded optimism - OIC chief

By Thomas Grove

ISTANBUL (Reuters) - The Muslim world is watching how the United States will act on the stalled process for Palestinian-Israeli peace and wondering how one of the main sticking points, Israeli settlements, will be resolved, the world's top diplomat for Islam said on Saturday.

Arab discontent over statements from Washington seen as favouring Israel culminated this week when Palestinian President Mahmoud Abbas said he did not want to run in an upcoming poll, citing disappointment with U.S. President Barack Obama.

Abbas' frustration with Obama centred on the U.S. administration backing away from support for demands for a "freeze" on Israel settlement building in the occupied West Bank and an endorsement of Israel's view that settlement expansion should not be a bar to resuming peace talks.

"We would like to keep our hopes that President Obama's commitments and good intentions will translate to reality, but of course we've found that the whole negotiation comes back to square one," said Ekmeleddin Ihsanoglu, secretary general of the Organisation of the Islamic Conference (OIC).

"The sine qua non for any negotiation is the stopping of the settlements ... We are still hopeful despite the fact that there are more reasons not to be hopeful," he told Reuters.

The 57-nation OIC, based in Jeddah, Saudi Arabia, was set up in the early 1970s when Islamic nations were divided along Cold War lines. While the body has no direct political power it represents more than one billion Muslims.

Israeli Prime Minister Benjamin Netanyahu has refused to halt construction in the settlements, many of which the Jewish state plans to annex under any eventual peace accord.

Palestinian elections are scheduled for Jan. 24, though few are anxious to take on Abbas' role, throwing into doubt the reconciliation of fighting Palestinian factions as well as the peace process with Israel.