RAMALLAH, West Bank, March 10 (Reuters) - The Palestinian Authority ordered on Wednesday the cancellation of a ceremony to honour a woman who led a 1978 hijacking of a civilian bus in Israel in which 35 people were killed.

The cancellation of Thursday's ceremony coincided with a visit to the occupied West Bank by U.S. Vice President Joe Biden, who met with Palestinian leaders as part of Washington's efforts to revive the moribund Middle East peace process.

Three Palestinian officials involved in organising the event to honour Dalal al-Mughrabi, killed in the Palestinian attack, said Israel told the Palestinian Authority to cancel the ceremony at which a traffic circle near Ramallah was to have been named after her and a memorial plaque unveiled.

The Israeli army, which controls access to the city, said initial checks could not find record of such a demand.

Mughrabi is remembered as a heroine by Palestinians in their quest for an end to Israeli occupation and the creation of a Palestinian state. Israelis consider her a terrorist.

A member of the Fatah group led at the time by the late Yasser Arafat, Mughrabi and a group of fighters landed by sea on a beach in northern Israel.

They shot dead an American woman taking photos of wildlife and then hijacked the bus on the busy Haifa-Tel Aviv highway, where they shot at passing cars.

The vehicle was brought to a halt at a police roadblock at the entrance to Tel Aviv, where a gunfight ensued and explosives detonated.

"The commemoration should have been on the 11th, on the anniversary of her martyrdom," said Rashida al-Mughrabi, Dalal al-Mughrabi's sister and an officer in the Palestinian Authority security forces.

"A decision to cancel the celebration came from official channels," she told Reuters.

Ahmed al-Tibi, an Arab member of the Israeli Knesset, or parliament, accused Israel of hypocrisy following an official commemoration of Jewish militants who attacked Arab and British targets in the years before the establishment of Israel in 1948.

The Knesset held a special session on Wednesday to commemorate 12 Jewish militants, members of Zionist groups that took up arms against both the British authorities which governed Palestine until 1948 and the territory's Arab citizens.

The 12 were either executed or committed suicide in jail. One had attacked a bus carrying Arabs. Two others were behind the 1944 assassination in Cairo of the British minister of state in the Middle East.

Prime Minister Benjamin Netanyahu, who spoke at the legislative session, said that as a general rule pre-state Jewish fighters attacked military targets unlike Palestinians who aimed to kill civilians.

Tibi and another Arab member of the chamber were ejected when they protested during the ceremony.