By Andrew Hammond

RIYADH, March 21 (Reuters) - Hamas leader Khaled Meshaal held talks in Saudi Arabia with King Abdullah late on Tuesday, ahead of an Arab summit which is expected to relaunch an Arab peace initiative with Israel.

The meeting follows the establishment of a Palestinian national unity government between the Islamist Hamas and the secular Fatah, based on a deal brokered by Saudi Arabia last month that ended months of deadly factional violence.

Saudi media carried pictures of the Damascus-based leader of the Islamist militant group smiling in what appeared to be friendly conversation with King Abdullah, saying only that they discussed "developments in the Palestinian situation".

Saudi Arabia and other Arab allies of Washington such as Egypt and Jordan say they want to use the summit to relaunch a peace plan originally floated at an Arab summit in 2002.

It offers Israel normal ties with Arab countries in return for full withdrawal from lands occupied in the 1967 Middle East war. Israel rejected the proposal at the time, but along with Washington has recently made more positive noises about it.

Israel has said it cannot accept some terms in the proposal, including the total withdrawal from all lands occupied in 1967 and the return of Palestinian refugees to what is now the Jewish state.

Hamas officials have welcomed the idea of a Palestinian state in the Gaza Strip and the occupied West Bank, including Arab East Jerusalem, but rejected recognition of Israel.

Saudi daily Okaz cited an Arab diplomat on Wednesday as saying Arab countries would reject any U.S. attempt ahead of the summit to persuade them to water down the plan.

U.S. Secretary of State Condoleezza Rice is to meet foreign ministers from Egypt, Jordan, Saudi Arabia and the United Arab Emirates in Egypt later this week.

Saudi Arabia, alarmed by political violence in Iraq, Lebanon and the Palestinian territories, has raised its diplomatic profile but risked the ire of its U.S. ally in warming to Hamas.

A senior Western diplomat in Riyadh said Saudi wants the Arab summit on March 28-29 to reinforce support for the Mecca accord, to which Washington reacted coldly.

"They want to give renewed backing to the Mecca accord, which was badly received by the Americans. And they want to revive the Arab peace initiative," the diplomat said.

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