* New buildings include ministerial, presidential offices
* Ramallah temporary seat of Palestinian government, PA says
* Former village becoming "eternal capital" of PA - critic
By Ali Sawafta
RAMALLAH, West Bank, Nov 30 (Reuters) - A building frenzy that is transforming Ramallah's skyline is also consolidating its position as the de facto Palestinian capital.
Once a village outside Jerusalem, the West Bank city increasingly appears to be assuming the role marked out for East Jerusalem in the Palestinians' statehood plans.
Smart hotels and apartment blocks are rising from the hilly terrain, a new presidential palace is under construction and the Palestinians are building new ministries for their government rather than continuing to rent out office space.
The Palestinian Authority, based in Ramallah since it was set up in 1994, says such projects are cost-driven. Renting is expensive, it says.
But the symbolic importance is not lost on Palestinians who fear Israeli policies are driving a widening divide between them and the Holy City just over the hills to the south.
Establishing sovereignty over East Jerusalem remains at the heart of the Palestinians' national agenda. But the two-decade old peace process which they hoped would deliver them the city as part of a state is foundering.
Israel, meanwhile, has deepened its control over Jerusalem, which it describes as its "eternal and indivisible" capital, while Ramallah is deepening its roots as the Palestinians' administrative and economic hub.
The PA is building a complex that will house seven ministries. The work, more than half complete, is one sign of Ramallah's transformation into the PA's "eternal capital", said Iyad al-Barghouti, a critic of PA policy on the issue.
"TEMPORARY" HEADQUARTERS
New presidential offices are being constructed at the compound where Mahmoud Abbas and Yasser Arafat before him have presided over the limited self-rule ceded by Israel.
Work has started on a new commercial district, the Ersal Center -- a ${esc.dollar}400 million investment envisioned as becoming a centre for Palestinian banking and trade.
And this month, Abbas opened new Ramallah headquarters for the Palestine Liberation Organisation (PLO), which was headquarted in East Jerusalem in the years between its establishment in 1964 and Israel's capture of the land in 1967. "God willing, the headquarters of the PLO will return to Jerusalem soon," Abbas said at the Nov. 23 opening ceremony of the building, which the PLO is renting. "All of our sovereign headquarters are temporary. The time will come, God willing, to move all of them to Jerusalem," Abbas said.
The Palestinians agree that none of their leaders can give up on Jerusalem, but their attachment collides with Israel's claim to a city that it has ruled for more than four decades.
After its occupation of Arab East Jerusalem in 1967, Israel annexed the newly captured part of the city, including the holy sites, together with a belt of surrounding West Bank land. The annexation has never won international acceptance.
U.S. efforts to revive peace talks between the sides have partly foundered over the issue of Israeli construction on annexed land around Jerusalem -- the Palestinians demanding a full halt to Jewish building there before any more negotiations.
The Palestinians say Israel's settlement expansion is part of a strategy designed to squeeze them out of the city.
"RAMALLAH IS WHERE IT'S AT"
They see the barrier Israel has put up between Jerusalem and surrounding West Bank Palestinian towns as part of the strategy. Israel started building the barrier on security grounds during the Palestinian Intifada, or uprising, earlier this decade.
Isolated from its traditional Palestinian hinterland, Arab East Jerusalem is in economic decline. The situation in Ramallah, just 20 km away, could not be more different, thanks in large part to generous financial support from Western donors.
The din of construction and a plethora of new cars are signs of economic growth estimated at 9 percent in the first half of the year. Ramallah's first five star hotel, a Movenpick that dwarfs surrounding buildings, opened for business this month.
"On the psychological and practical level Ramallah has become the eternal capital of the Palestinian Authority," said Barghouti, a sociologist who lectures at the Palestinian university of Birzeit, in the West Bank just outside Ramallah.
"The Authority is acting in a way that gives the impression that Ramallah is the capital of the state. It's not just a matter of whether they rent or build or buy, but the way they have focused the institutions of the PA in Ramallah," he said.
During a recent visit to East Jerusalem, a diplomat who once worked in Israel and the Palestinian territories noticed how much had changed in the space of a few years.
"East Jerusalem used to be the place where the Palestinian elite lived. The business and intellectual high flyers were all here, but now Ramallah is where it's at. Here it is dead, which is so sad," he said. (Writing by Tom Perry; additional reporting by Crispian Balmer; Editing by Samia Nakhoul)
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