(Adds second Abbas-Rice discussion, paragraph 7)

By Wafa Amr

RAMALLAH, West Bank, Nov 10 (Reuters) - Palestinian President Mahmoud Abbas on Saturday inaugurated a mausoleum built over Yasser Arafat's grave and vowed to press on with his iconic predecessor's drive for a Palestinian state.

Abbas, who is preparing for a U.S.-hosted peace conference with Israel, said he hoped Arafat's wish to be buried in Jerusalem would be realised along with the Palestinians' dream of making the Arab East of the city their capital.

"We will continue on the path to set up the independent Palestinian state with (Jerusalem) as its capital, God willing," Abbas said at an unveiling ceremony in the occupied West Bank.

Arafat founded the secular Fatah movement in the 1960s, leading the Arab fight against Israel before signing an interim peace deal in 1993. That agreement broke down in botched talks over a final accord. Palestinians again took up arms in 2000.

Abbas has sought rapprochement with Israel since breaking with the Islamist group Hamas over its seizure of Gaza in June. But preparations for the conference in Annapolis, Maryland have been overshadowed by disputes over what issues to tackle.

The two sides agreed on the need to revive a 2003 "road map" to peace, but the Palestinians said Israel balked at a U.S. proposal for overseeing implementation of the first stage, which demands the Palestinians curb militants and Israel stop building West Bank settlements and remove unauthorised settler outposts.

Abbas and U.S. Secretary of State Condoleezza Rice discussed the impasse by telephone on Friday and Saturday, Abbas spokesman Nabil Abu Rdainah said.

Israeli and U.S. officials had no immediate comment.

NABLUS HAUL

The Palestinians, hoping to prove that they can provide security, have deployed police in Nablus, a tinderbox West Bank city. On Saturday, police reported a significant weapons haul.

"We found more than 100 devices and suspect objects hidden in various places and we have detonated many of them," Nablus police chief Ahmad Sharqawi told Reuters.

Israel, which is trying to bolster Abbas against his Hamas rivals, approved the Nablus deployment, and Israeli officials say Palestinian forces can take control of other West Bank towns if it succeeds.

Though Arafat failed to create a state in territory occupied by Israel in the 1967 Middle East war, many Palestinians miss the charisma, cunning and street clout with which he cobbled together a national consensus among rival factions.

Arafat died in a French hospital on Nov. 11, 2004 after being shunned by Israel and the United States as an obstacle to peace. Abbas enjoys broad foreign support, but his strength is in doubt given the rift with Hamas and Israel's West Bank grip.

"Yasser Arafat has departed but he left you, President Abbas, with a heavy burden and a difficult legacy," Mohammed Ishtayeh, a former Palestinian cabinet minister who supervised the construction of the mausoleum, told Abbas in a speech.

The new structure, built of marble and Jerusalem stone adorned with Koranic verses, features a mosque and a minaret as well as an ornamental pool. The Palestinians also plan to open an Arafat memorial museum in the nearby government headquarters. (Additional reporting by Atef Saad in Nablus and Haitham Tamimi in Hebron; Writing by Ori Lewis; Editing by Andrew Dobbie)

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