New paragraphs 7-8 make clear U.S. Congress passed law in 1995 that said Jerusalem was capital of Israel and U.S. embassy should move there. But successive presidents, who set foreign policy, have refused to move embassy and U.S. diplomats say U.S. policy is aligned with other major powers in viewing status of Jerusalem as under negotiation between Israel and Palestinians.

RAMALLAH, West Bank, June 4 (Reuters) - Palestinian leaders reacted with anger and dismay on Wednesday to Barack Obama's pledge that Jerusalem should be Israel's undivided capital.

President Mahmoud Abbas rejected the U.S. presidential candidate's pledge to American Jewish leaders and he repeated his demand for a Palestinian state with Arab East Jerusalem as its capital.

"This statement is totally rejected," Abbas told reporters in the West Bank administrative centre of Ramallah.

"The whole world knows that East Jerusalem, holy Jerusalem, was occupied in 1967 and we will not accept a Palestinian state without having Jerusalem as the capital of a Palestinian state."

Abbas aide Saeb Erekat said Palestinian negotiators engaged in U.S.-sponsored peace talks would continue to insist on securing East Jerusalem, captured by Israel in 1967, as their capital. He said of Obama: "He has closed all doors to peace."

Obama, newly secure as the Democratic nominee for president, said in a speech in Washington: "Jerusalem will remain the capital of Israel, and it must remain undivided."

The U.S. Congress passed a law in 1995 describing Jerusalem as capital of Israel and saying it should not be divided, but successive presidents have used their foreign policy powers to maintain the U.S. embassy in Tel Aviv and to back negotiations between Israel and the Palestinians on the status of Jerusalem.

U.S. diplomats say that, despite the U.S. legislation, Washington's foreign policy is in practice broadly aligned with that of the United Nations and other major powers, which do not view Jerusalem as Israel's capital and do not recognise Israel's annexation of Arab East Jerusalem following the 1967 war.

The outgoing U.S. president, George W. Bush, has sponsored peace negotiations between Israel and the Palestinians in the hope of securing a deal on a Palestinian state before he leaves office in January. One of the thorniest issues is resolving the rival Israel and Palestinian demands on the future of Jerusalem.

DISAPPOINTED

Erekat, a Palestinian peace negotiator, said Abbas's administration was dismayed by Obama's endorsement of the Israeli claim: "We are very disappointed... He has failed to understand that without East Jerusalem as the capital of a Palestinian state there won't be peace with Israel."

Bush, whose Republican party has endorsed John McCain as its candidate, also disappointed many Palestinians during a visit to Israel last month. In strong terms, he assured the Jewish state of enduring U.S. support -- though he did not endorse Israel's demand to retain control of all Jerusalem as its capital.

In the Gaza Strip, where Abbas's Islamist rivals in the Hamas movement seized power a year ago, a Hamas spokesman also condemned Obama's stance on Jerusalem: "Obama's comments have confirmed there will be no change in the U.S. administration's policy on the Arab-Israeli conflict," Sami Abu Zuhri said.

"Hamas does not differentiate between the two presidential candidates, Obama and (Republican John) McCain, because their policies regarding the Arab-Israeli conflict are the same and are hostile to us."

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