By Wafa Amr

RIYADH, March 29 (Reuters) - Arab leaders will formally relaunch a five-year-old initiative on Thursday to trade peace for land and end the Arab-Israeli conflict which is at the heart of the region's problems.

A summit, which began on Wednesday, has drawn several world and Muslim leaders who backed the Arab peace plan offering Israel normal ties with all Arab countries in return for its withdrawal from land occupied in the 1967 Middle East war.

"The Arab peace initiative is one of the pillars for the peace process ... This initiative sends a signal that the Arabs are serious about achieving peace," U.N. chief Ban Ki-moon told Arab leaders on Wednesday, according to an Arabic translation.

Palestinian ambassador Jamal Shobaki said the leaders had agreed on Wednesday to endorse a set of resolutions influenced by the plan, which also calls for the creation of a Palestinian state and a "just solution" for Palestinians displaced in 1948.

"The leaders had approved all the draft resolutions in the closed session," he told Reuters. "Tomorrow the session will only include speeches by some of the leaders before the final communique is read."

Israel has objected to key elements in the plan, including the proposed return to 1967 borders, the inclusion of Arab East Jerusalem in a Palestinian state and the return of Palestinian refugees to homes in what is now Israel.

Islamist group Hamas, which heads the Palestinian government, has also called on Arab leaders not to compromise on the right of refugees to return to homes lost in the turmoil surrounding the creation of the Israeli state.

A final draft resolution calls for a "just solution" to the problem of Palestinian refugees who fled their homes in 1948 but avoids any mention of the phrase "right of return".

UNITED FRONT

The Arab summit comes against a tense regional backdrop, with fears high among Arab leaders that a U.S.-led attack on non-Arab Iran, which has refused to comply with U.N. demands to halt atomic work, could further destabilise their region.

Riyadh, pressed by its ally Washington to show more leadership in the region, has called on Sunni Muslim states to overcome divisions, arguing a united front will help persuade Israel to address Palestinian grievances.

Saudi King Abdullah called at the start of the summit on Wednesday for an end to the international blockade on the Palestinian government.

"It has become necessary to end the unjust blockade imposed on the Palestinian people as soon as possible so that the peace process can move in an atmosphere far from oppression and force," King Abdullah said.

Saudi Arabia last month brokered a unity government of Palestinian President Mahmoud Abbas's Fatah faction and Hamas, hoping it would help end a crippling Western blockade imposed after the Islamist group took office over a year ago.

Israel and the United States have urged countries to cut political and financial support to the Hamas-led government because Hamas refuses to recognise Israel, renounce violence and accept existing peace deals.

While resolutions will focus on the decades-long conflict at the heart of the region's problems, crises in Iraq, Sudan and Lebanon are also on the agenda.

Iraqi Foreign Minister Hoshiyar Zebari told Reuters the summit resolutions would include a call by Iraq's government for all militia to disband and for the constitution to be revised.

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