RAMALLAH, West Bank, May 22 (Reuters) - President Mahmoud Abbas on Saturday swung behind a campaign to stop Palestinians buying goods produced by Israeli settlements in the West Bank, urging all Palestinians to shun the products.

Abbas dismissed Israeli accusations that the campaign amounted to incitement of hatred against the Jewish state -- something the United States has urged him to prevent as it mediates indirect peace talks between the sides.

The 75-year old Palestinian leader opened his door to volunteers distributing leaflets detailing products from furniture to wine and soft drinks which the Ramallah-based Palestinian Authority has banned from Palestinian markets.

I call on all Palestinian citizens to do the same and to boycott these goods, said Abbas, speaking in public for the first time about a campaign spearheaded by his prime minister, Salam Fayyad.

He put a sticker on his door declaring his house free of settlement goods.

We are not inciting against Israel. We do not want to boycott goods coming from Israel, he said, distinguishing between products produced by Israel and those made in settlements built on occupied land.

Palestinian consumers, their economy tied to Israel's, depend on goods from Israel.

Israeli Finance Minister Yuval Steinitz said on Friday the boycott was undermining the latest U.S. effort to advance the peace process.

It's not the right way to approach negotiations, he told Israel's Channel 1 TV channel, adding that settlement goods were often produced together with factories in Israel.

By banning settlement goods, the Palestinians hope to undermine the economic viability of the enclaves which pepper the West Bank. They also hope to encourage European Union member states to ban trade with enterprises in the settlements, which are considered illegal under international law.

Settlements in the West Bank and East Jerusalem are home to some 500,000 Jews living among 3 million Palestinians. World powers view them as an obstacle to a peace deal that would create a Palestinian state next to Israel.

Abbas signed a presidential decree in April stipulating punishments ranging from fines to imprisonment for Palestinians dealing in settlement goods. The Palestinian Authority also aims to stop Palestinians from working in the Israeli enclaves.

Palestinian officials estimate the value of settlement goods sold in the Palestinian market at up to $500 million. The settlements employ around 25,000 Palestinians.

The United States this month started mediating indirect peace talks aimed at ending the decades-old conflict through the creation of a Palestinian state. U.S. President Barack Obama has warned both sides that they will be held accountable if either does anything that undermines the effort. The Palestinians take that to mean that Israel will refrain from declaring new building plans in East Jerusalem. (Writing by Ali Sawafta and Tom Perry; Editing by Angus MacSwan)