Tens of thousands of Palestinians rallied in Ramallah’s Yasser Arafat Square and other cities across the West Bank to support their campaign for statehood at the United Nations.

The festive crowds waved Palestinian flags and chanted independence slogans as speakers pledged backing for Palestinian Authority President Mahmoud Abbas two days before he speaks at the UN General Assembly and is expected to ask for membership. A masked youth set fire to a U.S. flag after the speeches and was detained by police.

“Mr. President, we are behind you,” Laila Ghanam, governor of the Ramallah region, told the rally from a city square freshly renamed for Arafat, the Palestine Liberation Organization founder who died in 2004. “We will continue the struggle. It is time to close the chapter of suffering and pain.”

The West Bank demonstrations in Ramallah, Nablus, Hebron, Bethlehem and other parts of the territory started hours before Abbas was scheduled in New York to meet U.S. President Barack Obama, who has been trying to sidetrack the Palestinian statehood effort. Israel is increasing pressure on the Palestinians to drop their bid for recognition, calling for a resumption of peace talks and threatening to cut a major source of revenue if there is a UN vote for statehood.

Israel is ready to “negotiate at the highest level,” Mark Regev, Prime Minister Benjamin Netanyahu’s spokesman, said yesterday, after urging Abbas to return to talks.

Veto Threat
Israel’s Five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, were little changed at 189, the highest level in at least two years, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market.

Abbas informed UN Secretary-General Ban Ki-Moon this week that he plans to ask the Security Council to recommend that Palestine become the world body’s 194th member. The U.S. has threatened to veto any resolution in the Security Council, a step that might alienate the Arab world.

At the rally in Ramallah, the masked young man tried to burn the flag during an address by Tayeb Abdel-Rahim, a senior Abbas deputy, who shooed him away. The youth returned after Abdel Rahim’s speech and set the flag on fire to applause from the crowd. He was detained by police and released. Palestinian officials have said they will act to stop any unrest during demonstrations.

Ready for Statehood
Prime Minister Salam Fayyad, who returned from meetings with foreign donors in New York, said in a radio address that the government is ready for statehood.

“ We are determined to move forward in the effort to reduce dependence on foreign aid and, God willing, we will be able to do without them as soon as possible,” he said.

In southern Israel, a rocket launched from the Gaza Strip hit an open area without causing damage or injury, the Israeli army said in a text message to reporters. It was the second rocket from Gaza this week.

Israel Minister of Finance Yuval Steinitz said a declaration of statehood might lead to a new suspension of his government’s transfer of some of the $100 million per month in custom fees it collects on the Palestinian Authority’s behalf.

“I think it will be very difficult for us to continue to collaborate with a hostile Palestinian entity,” Steinitz said in an interview yesterday. Withholding as much as 40 percent of the money “is a possibility,” he said.

‘Misguided and Dangerous’
Israel controls the borders and has withheld the taxes in the past, during disputes and to pressure the Palestinians. Both the U.S. House and Senate have called on Obama to reduce the Palestinians’ annual $500 million in foreign aid if they proceed at the UN.

For Obama, the pressure to be seen as unwaveringly in support of Israel is mounting ahead of 2012 elections. Republican presidential candidate Rick Perry, the governor of Texas, yesterday said Obama’s Middle East policy was “naive, arrogant, misguided and dangerous.”

The European Union’s foreign policy chief, Catherine Ashton, and former British Prime Minister Tony Blair, representing the so-called Quartet mediating group, are leading a last-minute bid to work out an agreement that might lure Abbas back into talks and avoid a Security Council confrontation. The Quartet is comprised of the U.S., UN, European Union and Russia.

Settlement Freeze
One approach might be to let the UN’s administrative process slow down a Palestinian application to the Security Council to give diplomats days or weeks to try to come up with an alternative that restarts peace talks. The U.S. might use the time to lean on council members to vote against the Palestinians or abstain.

“The idea of majorly slow-tracking this is being floated by multiple officials, including Palestinian officials, American officials, and it’s being welcomed,” said Hussein Ibish, a senior fellow at the American Task Force on Palestine, a Washington-based group that advocates a peaceful resolution to the Middle East conflict.

Peace negotiations collapsed last year following Netanyahu’s decision not to extend a 10-month partial freeze of construction in the West Bank’s Jewish settlements. Abbas has said he won’t resume talks while building continues. Netanyahu, who hasn’t offered to resume the freeze in settlement building, has repeatedly said that Abbas should restart direct talks.

‘No Trust’
“We are all talking about how we can get back into negotiations, get Israelis and Palestinians back into negotiations,” British Foreign Secretary William Hague told Sky News yesterday, before meeting with Abbas. “There is no progress to report.”

Abbas also met yesterday in New York with French President Nicolas Sarkozy.

“Nobody is budging,” Cliff Kupchan, an analyst at New York-based research firm Eurasia Group, said in an interview. “It is likely Abbas will apply to the Security Council for membership on Friday. There is no trust anywhere. The Israelis, Palestinians and Americans all distrust each other. It could be a hot Friday.”

Abbas is scheduled to address the UN General Assembly about an hour before Netanyahu speaks.

“Cutting off funds to the Palestinians carries with it a lot of repercussions that are not exactly in favor of Israel,” said Marwan Muasher, a vice president at the Carnegie Endowment for International Peace, a policy research group in Washington, and Jordan’s first ambassador to Israel. “If the Palestinian people see that their lifeline is cut off by Israelis, that might be the trigger for large-scale demonstrations in the West Bank and Gaza, especially in the context of what’s been happening in the Arab world.”