By Crispian Balmer
JERUSALEM, April 29 (Reuters) - With Middle East peace talks frozen and expectations of a negotiated deal at an all-time low, a growing number of Israeli politicians believe it is time for the government to set the nation's own borders unilaterally.
Some seek the annexation of most of the occupied West Bank, others say only the big Jewish settlement blocs should be brought under Israeli sovereignty, while a third group calls for a partial pullout to create a de facto Palestinian state.
Such actions would break the dynamics of the U.S.-driven peace process, which has been bogged down by years of failure and recrimination. By the same token, it would likely unleash a firestorm of protest at home and abroad.
"I think an era has ended and a new era has begun," said Economy Minister Naftali Bennett, a hawkish, hi-tech tycoon and head of the nationalist Jewish Home party, which has always opposed negotiations with the Palestinians.
Bennett said Palestinians should be given "autonomy on steroids" in areas of the West Bank where they already exert some control, while the remaining 62 percent of the territory should be gradually annexed to Israel.
"I know this is not as sexy as the perfect two-state solution, but this is realistic," he said on Sunday.
Many Israelis would question how realistic it would be to orchestrate such a massive land-grab in the face of almost certain ferocious world condemnation, and Bennett himself recognised that his policy push was not yet mainstream.
But support for some form of unilateral annexation does appear to be gaining traction amongst right-wingers.
RISING STAR
Palestinian President Mahmoud Abbas wants to create an independent state in the West Bank, East Jerusalem and the Gaza Strip - land Israel captured in the 1967 war.
The latest round of talks aimed at creating a fully sovereign Palestine hit the rocks last week, with Washington blaming both sides for failing to compromise. What happens next remains uncertain.
Israel annexed East Jerusalem more than 30 years ago, in a move not internationally recognised. It pulled its forces from Gaza in 2005, but still maintains direct control of the bulk of the West Bank, known as Area C, while allowing the Palestinians varying degrees of self-rule over the rest - Areas A and B.
The Jewish settlements that pepper the West Bank and that are home to some 350,000 Israelis are all in Area C.
"I am recommending that preparations begin to annex Area C lands, those places in which, in any event, a Jewish population lives," Civil Defence Minister Gilad Erdan, who is also a member of the powerful security cabinet, told Army Radio on Sunday.
Erdan is close to Prime Minister Benjamin Netanyahu and is seen as a rising star in the ruling Likud Party. The vast majority of Likud lawmakers have never endorsed the two-state solution, and instead warmly embrace the settlement movement.
"We can begin to prepare to annex if we don't have a Palestinian partner and if the situation does not appear to change," Erdan said, suggesting that such a move would cover some four percent of West Bank land.
Palestinians accuse Israelis of sabotaging the nine-month talks, arguing that settlement expansion, announced even as the negotiations were being held, undermined the whole process.
Peace Now, an Israeli group that monitors and opposes settlement activity, said in a report issued on Tuesday that during the nine-month negotiating period, Israel finalised plans for the construction of 4,868 settler homes.
Annexation of any part of the West Bank would unleash a furious Palestinian response.
Netanyahu has not spoken about the issue, but he would come under heavy pressure from allies to act decisively if the Palestinians carried through on a threat to join a battery of international bodies from which they could lambast Israel and pursue their statehood goals.
However, political analysts doubted whether Netanyahu would want to head down the path of annexation, knowing that it could turn him into a pariah on the world stage.
"I don't see him annexing territory, because that is against international law. If you want to take unilateral steps, you have to do things in a wiser fashion," said Uri Dromi, who was a spokesman for former Prime Minister Yitzhak Rabin.
Rabin was assassinated in 1995 by an ultra-nationalist Jew opposed to an interim peace deal he had negotiated with the Palestinians, which gave them limited self-rule in the West Bank and Gaza.
"We should say that the big settlements will stay and we will keep on building in them, and the little ones will go. But don't annex anything, keep the door open for the Palestinians to come to the table and work out a land swap," Dromi said.
JEWISH STATE
Without a formal peace treaty, diplomats have warned that continued settlement building will soon prevent the Palestinians from having a viable, contiguous state. If that happens, they say, Israel and Palestine might then morph into a single state.
Finance Minister Yair Lapid, the head of Israel's second largest party, Yesh Atid, says this must never occur, cautioning that it would mark the death of Israel as a Jewish State.
"My father did not come from a ghetto to live in a Judeo-Arab state. He came to live in a Jewish state. Since there is no way to absorb four million Palestinians, we need to separate from them," he said recently, without elaborating.
However, a senior official from Lapid's party, who declined to be named, said that if the talks are officially declared dead, Yesh Atid might push for a unilateral demarcation of a Palestinian state enabling Israel to keep the major settlements.
This would leave many of the core issues of the conflict unresolved - such as the fate of Palestinian refugees who still live in squalid camps around the Arab world - and would be rejected out of hand by Palestinians as an illegal imposition.
But even some of the more moderate Israeli voices who have been closely involved with peace-making efforts over the past two decades, believe the time is approaching for a rethink.
"Given the fact we have been trying for over 20 years and failed, we should think about different paradigms," said an Israeli official knowledgeable about the latest talks, but who declined to give his name because of the sensitive subject.
Saying the time might have come for unilateral measures, the official added: "If we can't reach a deal with (the Palestinians) maybe we should shape our destiny in our own hands rather than hand them a veto power over our future." (Editing by Ralph Boulton)
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