RAMALLAH, West Bank, Sept 25 (Crispian Balmer/Reuters) - If at first you don't succeed, try, try again.

After failing last year to win recognition of full statehood at the United Nations, Palestinian President Mahmoud Abbas returns to New York on Thursday to ask the General Assembly for a less ambitious status upgrade.

This time around, he looks certain to get his way, but the resolution he plans won't bring independence any nearer. It will also anger the United States and Israel, which is likely to retaliate with painful economic countermeasures.

So why is he doing it?

The fact that Abbas believes the best way forward for the Palestinian cause lies in diplomatic gestures thousands of miles from home underscores the dearth of decent ideas to end 64 years of unresolved conflict.

The Palestinians don't have strategy, nor do the Israelis or even the Americans, said Aaron David Miller, a former senior State Department adviser on the Middle East peace process, now at the Woodrow Wilson Center in Washington.

The strategy is getting by and trying to prevent a blow-up. But one day there will be a blow-up and ... sadly, the situation is going to get worse before it gets worse (sic).

In an indication of how things could degenerate, thousands of Palestinians this month attacked their own security forces in the cities of Hebron and Nablus in the occupied West Bank in a protest over the high cost of living.

The Palestinian Authority (PA) scrambled to defuse the crisis, rolling back tax hikes, while Israel looked on in alarm, aware that tensions are growing after years of stalemate in official peace-making.

There have been no direct talks since 2010, when the Palestinians refused to resume negotiations unless Israel suspended settlement building in the West Bank and East Jerusalem, which they say is killing off all chances of them ever creating a coherent state.

U.N. Secretary-General Ban Ki-moon said on Tuesday the so-called two-state solution was the only sustainable option for peace, but that the continued growth of Israeli settlements meant that the door may be closing, for good.

COLLAPSE

In 2011, when Abbas bid for full U.N. statehood, there was excitement in the West Bank. Posters trumpeting the drive hung from lampposts and a giant wooden chair was erected in the city of Ramallah to symbolise the U.N. seat the Palestinians wanted.

Predictably, the request wilted in the face of fierce U.S. opposition, and the chair collapsed during a winter storm.

Twelve months on, there is no repeat of last year's eager anticipation as Abbas readies his more modest bid to raise the Palestinians' U.N. status from observer entity to observer state - the same rank as that granted to the Vatican.

We deserve to become a fully recognised state, not this halfway step. We don't understand what it means or what it will achieve, said Manal Hassan, 26, a part-time school teacher in Ramallah, reflecting widespread apathy across the West Bank.

In fact, the revised U.N. push could make life much more uncomfortable for the Israelis, even if it won't bring any immediate change to the situation on the ground.

Being registered as a state rather than an entity means the Palestinians will be able to join bodies such as the International Criminal Court (ICC) and file a raft of complaints against Israel for its continued occupation.

This will help level the playing field, veteran Palestinian negotiator Saeb Erekat told Reuters last week.

He said the change would be voted on before the end of the year. The U.S. has no veto in the General Assembly, where some 120 of the 193 member nations have already recognised Palestine as a state.

The Israelis have already signalled their concern.

I don't pretend this is good for us, but it will be worse for them, Deputy Prime Minister Dan Meridor told reporters in Jerusalem on Monday. This is an easy and a wrong way out.

Israeli officials have indicated in private that one likely reprisal would be to hold back tax revenues the Jewish state collects on behalf of the Palestinians, which account for around two-thirds of their overall revenues.

Pro-Israeli politicians in Congress froze some $200 million of badly needed aid for the Palestinians in retaliation for last year's U.N. drive, and are likely to up the pressure once more.

ECONOMY IN TROUBLE

Both states will have to calibrate their reaction carefully.

The World Bank and International Monetary Fund issued grim reports this month on the state of the Palestinian economy, warning of social upheaval unless foreign funding increases and Israel eases long-standing curbs on development.

Indeed, Israel has moved this month to prop up the West Bank economy, hastening the transfer of funds to the PA and offering 5,000 more permits to allow Palestinians to work in Israel, where wages are higher than in their own territories.

Israel believes the path to statehood lies through direct talks and says unilateral moves are in violation of the 1993 Oslo accords, which were intended to path the way to a final status agreement within five years.

The Palestinians say rampant settlement building has all but destroyed their chances of creating a coherent state.

Abbas instructed his political allies this month to examine the possibility of scrapping Oslo and renouncing their partial control over the West Bank, effectively handing all the territory back to Israel and upping the cost of the occupation.

Analysts rule out such a drastic step, but say the fact that he is raising it shows how the options are narrowing for Abbas, who has long since lost control of Gaza to the Islamist militant group Hamas, and whose own electoral mandate expired in 2009.

The leadership has been unable to deliver to the public on anything, said Ghassan Khatib, former spokesman for Prime Minister Salam Fayyad and now a lecturer in contemporary Arab studies at Birzeit University.

Khatib even doubts whether Abbas will deliver in the United Nations, believing that he might pull back before a vote to give more space to whoever wins the U.S. presidential election in November to contrive a final diplomatic push with the Israelis.

Western diplomats in Israel agree that Abbas is under huge external pressure to shun a U.N. resolution, and say time is running out.

We are concerned that if he pushes forward with this, then the United States will simply walk away from the issue, one senior diplomat said. Without direct talks, our assessment is the two-state solution could be dead within 18 months. (Additional reporting by Jihan Abdalla)