By Adam Entous

WASHINGTON, Nov 26 (Reuters) - If ever there was a sign of the obstacles to U.S. President George W. Bush's goal of fathering a Palestinian state, it was in the haggling over a paper to chart the course to Middle East peace.

Israeli and Palestinian negotiators were so divided over a joint paper for Tuesday's Annapolis, Maryland, peace conference that 10 days ago they were arguing over just what to call it -- a document or a statement.

The war over words went long into the damp Washington evening on Monday, underscoring the low expectations for the three-day gathering Bush called to launch a drive to forge a deal on statehood before he leaves office in 14 months.

Officials involved in the negotiations said the scope of the paper had evolved dramatically since its inception. But typical of Arab-Israeli peacemaking, each and every sentence was being weighed carefully by one side, the other or both.

The initial idea was for the paper to give Palestinians a "political horizon" for statehood by addressing in general terms the toughest issues of their conflict such as borders, the future of Jerusalem and Palestinian refugees.

But as it became clear the conference would mark the start of formal negotiations on these so-called "core" issues, the scope of the paper shifted away from the substance to the procedures that will guide future talks.

Each side faced pressures at home that kept it from making statements which might be perceived as early concessions.

Already weakened by the Islamic militant group Hamas's takeover of Gaza, Palestinian President Mahmoud Abbas can ill afford to cede even a little on the Palestinians' right to return to former homes in what became Israel.

Hobbled politically by corruption scandals and last year's war in Lebanon, Israeli Prime Minister Ehud Olmert knew even a vague mention of dividing Jerusalem could prompt rightist coalition members to bolt from his government.

"Both sides realized they could not deal with core issues except as a package," said an Israeli official familiar with the talks.

"The only way they can agree is to agree not to address the issues of substance," said another senior Israeli official involved in negotiations.

U.S. PRESSURE

It remained to be seen whether pressure from the Bush administration would coax the sides into a deal.

Stumbling blocks had included:

- Palestinian demands for a timeline for reaching a final agreement.

- The makeup of a committee to oversee implementation of the long-stalled U.S.-backed "road map" peace plan.

- Olmert's demand the Palestinians accept Israel as a homeland for the Jewish people.

Creative fixes were found in some of the disputes.

Instead of a binding eight-month timeline sought by the Palestinians, Olmert and U.S. Secretary of State Condoleezza Rice have publicly stated their goal to reach an agreement before Bush leaves office in January 2009.

Both sides have agreed to direct U.S. monitoring of their commitments under the road map, but it remains unclear whether the oversight will be binding on the parties.

Monitoring is key because Olmert has said he will not implement any agreements until the Palestinians crack down on militants as called for under the road map.

Israel objected to a proposal backed by the Palestinians for a three-way security committee that would bring together Israel, the Palestinians and the United States. Israel said it would give Palestinians access to sensitive intelligence.

Israel has yet to meet its own road map obligations to freeze all Jewish settlement activity and uproot outposts set up without Israeli government authorization.

The difficulties of reaching an agreement on a joint paper -- let along a final peace deal -- were highlighted by a leaked draft dated Nov. 17. In the draft paper, Israel proposed calling it a joint "statement." The Palestinians opted for the more binding term "document."

Israel balked at Palestinian language that would make explicit reference to East Jerusalem, captured by Israel in the 1967 Middle East war, becoming the capital of a future Palestinian state.

The preamble, agreed by both sides, had called for "an end to bloodshed, suffering and decades of conflict between our peoples," though it was unclear if that language would make it into the final paper. (Editing by Howard Goller)

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