By Alastair Macdonald

ARIEL/MARDA, West Bank, Nov 23, Reuters - The rolling hills inland from Israel's busy coastal strip are dotted with towns and villages nestled under towers rising above the olive groves. Look closely, though, and one sees differences. Some towers are the minarets of mosques, others are concrete lookout posts for Israeli troops guarding Jewish settlements in the West Bank.

These are uneasy neighbours and the future of the settlers, who have built on land occupied by Israel in 1967, is among the "core issues" Palestinians and Israelis must resolve if they are ever to make peace in negotiations to be launched at next week's U.S.-hosted Middle East conference in Annapolis, Maryland.

Few around the settlement of Ariel see much chance of that -- Israeli residents are determined to stay and build, whatever their government decides, and Palestinians insist the settlers must go in order for them to establish a functioning state.

"My vision is ... to build here a city of 60,000 people," says Ron Nachman, mayor of Ariel, today home to about 18,000.

"As long as I live and I have the power and the strength I'll do everything in order to fulfill this vision," Nachman added, sitting in his office in the neat, hilltop industrial town, 40 km (25 miles) east of Tel Aviv's beaches.

"I want to live in peace with my neighbours."

A few hundred metres (yards) down the hill, that vision is not shared by Sadeq al-Khuffash, the mayor of Marda: "I don't dream of us living together ... These are settlements built illegally on our lands. They should be removed ... You can't expect me to live with the people who took our land by force."

SETTLEMENT FREEZE

The World Court says settlements, home to some 270,000 Jews among 2.5 million Palestinians in the West Bank, are illegal.

Israeli Prime Minister Ehud Olmert reiterated a pledge to curb expansion this week and wants to abandon outposts while arranging land swaps to make Ariel and others part of Israel.

For the 2,400 people of Marda, where murals lauding Basque guerrillas painted by visiting activists from Spain brighten the dusty main street, Ariel and a string of smaller settlements cramp their daily life by imposing security restrictions on their movement and, Palestinians say, curbing access to water.

Nachman brands as "a big lie" the charge that Ariel pumps up water from a major underground supply and deposits its sewage on Palestinian land. "Untrue," says Khuffash when told of Nachman's assertion that Israel offers water to the Arabs on good terms.

Hard to reconcile, the two man have, they say, never met.

Water is an increasingly scarce resource in the Middle East and is, in itself, a core issue for any future peace accord.

Khuffash also complains his 3-km (2-mile)trip to the town hall from the insurance office he runs takes him half an hour by car because Israeli roablocks create a 20-km diversion. Locals in Marda say olives are rotting on the trees this month because Israeli troops keep them from harvesting groves close to Ariel.

Nachman rejects charges the town he helped found in 1978 took any private land -- "there was nothing, only boulders".

"Tomorrow, if we establish a Palestinian state, how would they make a living?" he asks. "What water would they drink?"

Pointing to daily attacks from the Gaza Strip, from which Israel withdrew in 2005, Nachman believes Israel cannot be secure living next to an independent Palestine. The formula of handing over land in return for peace does not work, he insists.

Olmert's readiness to end settlement under pressure from President George W. Bush and Middle East envoy Tony Blair angers him: "The government asked me to come. So to come to me and say I'm an obstacle to peace, it's not only stupidity, it's evil."

In Marda, Khuffash sees little hope of change: "The siege and poverty ... and hunger will go on. Nothing has changed and after Annapolis there will be no real change in our life."

Hundreds of people from Marda have sought work abroad, he says -- many of them half way round the world, in Venezuela.

Asked about an incident this week in which gunmen killed a settler nearby, Khuffash says: "This is our home and resistance is a legal right. If there is no respect for agreements and international law, things will go on like this, with violence."

But neither violence nor an Israeli government withdrawal persuade Nachman Ariel's future is in doubt: "What I have done here is a fact on the ground," he says. "When Tony Blair has passed away, and President Bush, and I, this will remain." (Editing by Dominic Evans)

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