JERUSALEM, Jan 18 (Ari Rabinovitch/Reuters) - Israel and the Vatican are in talks to end a long-running dispute over the ownership and tax status of religious sites in the Holy Land, including a place revered as the location of Jesus' last supper.

Churches acquired large amounts of land around Jerusalem as the Ottoman empire went into decline from the early 19th century, long before Israel was founded in 1948.

Today, many official Israeli buildings sit on leased church land. But agreement on the legal status of these ancient properties has evaded governments and popes for decades.

The new state naturally inherited the obligation to respect and observe those rights created before it came into being, said a Catholic expert on church relations with Israel, who spoke on condition of anonymity.

The Vatican was looking to safeguard its rights under international treaties and customs that date back before the establishment of the modern Jewish state, the jurist said.

One Jerusalem building in dispute stands in a narrow alley outside the Old City walls. Its second storey is the Cenacle where Christians believe Jesus held the last supper. Jewish tradition says the floor below is the burial site of King David.

Deputy Foreign Minister Danny Ayalon, head of the Israeli negotiating team, says the Vatican would like control of the Crusader-era building, which was a stop on Pope Benedict's whirlwind tour of the Holy Land last year.

Israel wants to keep the status quo on ownership, ensuring its sovereignty, while reaching a settlement over debts accrued over years of taxes owed to the state by the church.

We are more than willing to assure the church that we will keep all the properties intact and protected, said Ayalon.

It's really a matter of trust and relationship ... and I believe this is main issue, he told Reuters in an interview.

The Vatican seeks recognition of its historic rights to tax exemption, and to set rules for protection of religious sites and the return of what it calls lost church property.

The negotiators met this month for but failed to reach a deal and agreed meet again.

Though only a handful of sites are being discussed, the outcome may have an impact on future transactions, particularly in Jerusalem, where religious institutions are huge land owners.

An Israeli official familiar with the talks said Israel was worried that any broad concessions would set a precedent.


IMPROVING RELATIONS?

Relations between Jews and the Catholic church are uneasy.A visit last May by Pope Benedict caused some controversy and his decision last month to move wartime pope Pius XII a step closer to sainthood angered Jews who believe Pius did not do enough to help Jews during the Nazi Holocaust.

In a gesture of reconciliation, Benedict paid his first visit to Rome's synagogue on Sunday. But ties are coloured by the Church's past anti-semitism and both sides remain cautious. Israel has guaranteed the Church open worship in the Cenacle and would consider offering it more involvement, but Ayalon said ownership was not up for discussion.

Israel reserved the right to appropriate property especially to build infrastructure for public safety, while guaranteeing it won't harm the holy sites. The Vatican wants to prevent this.

The Church wishes for safeguards against future 'taking' by the state of her property, the Catholic expert said, as well as the restitution of certain properties 'taken' in the past.

The reference, he said, was to a church that had been razed in the northern Israeli city of Caesaria in the 1950s.

Neither side would give details of the negotiations -- such as the amount of tax involved or when a deal might be concluded.

The sooner the better, said Ayalon, who travels to the Vatican in May for the next round of talks. (Editing by Paul Taylor)