RAMALLAH/TEL AVIV, Jan 12 (Reuters) - A Palestinian-American businessman's attempt to take control of an Israeli company developing a Jewish settlement in East Jerusalem was shot down on Wednesday when bondholders rejected his buyout offer.

Bashar Masri's bid for the struggling Tel Aviv-listed Digal Investments and Holdings Ltd, developer of the site, touched a political nerve and drew opposition from Jewish settler activists who he blamed for undermining the deal.

Masri had planned to develop the Nof Zion settlement to help meet the housing demands of Palestinians in East Jerusalem, who find it very difficult to obtain building permits from Israel's Jerusalem municipality.

You can look at this in many ways, but there is only one conclusion: the power of the radical racists has overcome the reasonable minded people in Israel, Masri told Reuters.

Nof Zion is being built in a predominantly Arab area of East Jerusalem on land Israel occupied in 1967 and later annexed. Israel views East Jerusalem as part of its capital, though its annexation has never been recognised abroad.

The Palestinians want East Jerusalem to be the capital of the state they aim to found in the West Bank and the Gaza Strip. The dispute over Israel's settlement policy has derailed U.S.-backed peace talks.


IDENTICAL OFFERS

A statement released on behalf of Digal's bondholders and distributed by the firm said they had rejected an offer made by a lawyer representing Masri and accepted a rival bid submitted on Jan. 3.

Masri said his offer, presented 45 days ago amounted to 60 percent of the face value of the Digal bonds. Bondholders on Wednesday rejected it by a majority of 94 percent. They opted instead, by a majority of 77 percent, for what he said was an identical rival bid.

Masri attributed their rejection of his offer to pressure from settler activists who mobilised to stop Nof Zion falling into Palestinian hands.

A Digal official said the rival bid was made by Israeli businessman Rami Levy and an Australian Jewish investor.

Masri said his bid had been going smoothly until his national identity, which he said he had never hidden, spread in the Israeli media last month.

This is just one project. I'm sure there will be more projects to come. Knowing what we know today, we need to be more discreet, he said.

Digal had built 91 homes at the site overlooking Jerusalem's walled Old City and had a licence from the Jerusalem municipality for a total of 400, Masri said.

On its Web site, Nof Zion is described as a private luxurious neighbourhood with a community synagogue.

Masri said he tried but failed to take control of Digal in 2009 by buying out some of the shareholders. According to its Web site, Digal is planning to build two hotels in Tel Aviv, as well as Nof Zion, which Masri said was his main interest in the company.

He is managing direct of Bayti Real Estate Investment Co, the firm behind the Rawabi project -- a new urban development near the Palestinian city of Ramallah in the West Bank. The Digal official said completion of the offer accepted by the bondholders on Wednesday required the approval of both the court and Israel's Bank Leumi, which has an outstanding debt of 80 million shekels ($22.6 million) with the firm. ($1=3.54 shekels)