RAMALLAH, West Bank, Nov 10 (Reuters) - Facing failure in his bid to win full United Nations membership for Palestine, President Mahmoud Abbas may be forced to seek a lesser upgrade of his nation's status in the world body to protect his credibility from attack by Hamas.

Even going for "observer state" rank at the U.N. will likely expose the Palestinian Authority to more pressure from the United States and Israel, which have imposed financial sanctions in a bid to curb the Abbas administration's diplomatic campaign.

But Abbas has few alternatives if he wants to build on the domestic momentum his statehood drive has generated, compared to paralysis in the peace process upon which he had built his strategy for steering the Palestinian national struggle.

With peace talks frozen, other elements of Abbas's policy also are at a standstill. Reconciliation with Hamas is going nowhere. Instead, rivalry with the Islamist group which governs Gaza may force Abbas further down the U.N. path.

"I agree he has to do it," a diplomat said, discussing whether or not Abbas will seek to make Palestine an observer state after the bid for full membership fails.

The Palestinian application for full U.N. membership is expected to come to a head on Friday with the submission of a report by a Security Council committee studying the request.

Unsurprisingly, the committee has been unable to reach consensus on whether Palestine should be accepted as a U.N. member, according to a draft of its report circulated this week.

The upgrade to an observer state, which would put the Palestinians on the same diplomatic footing as the Vatican, could be secured with a U.N. General Assembly vote, bypassing the Security Council, where the United States has a veto.

Officially, the Palestinians will consult the Arab League on their next move. Unofficially, those familiar with Palestinian policy-making say the decision ultimately rests with Abbas. His track record makes it hard to predict when that could be, though waiting too long will draw charges of dithering.

The bid for full U.N. membership, an upgrade from the Palestinians current status as an "observer entity", was doomed from the start, mainly by U.S. opposition.

Echoing Israel's view, Washington is against the move on the grounds that it is an attempt to bypass the peace process. Bilateral talks are the only way forward, it says.

At the General Assembly, the Palestinians would be guaranteed success thanks to the kind of support that helped them secure membership of the U.N. cultural agency UNESCO on Oct. 31, with backing from 107 states and only 14 votes against.

Abbas might be encouraged to take such a step by the support of states including France, which backed the UNESCO move.

"LIMITED AND DIFFICULT" CHOICES

As an observer state, Palestine would have access to more international bodies.

Most importantly for Abbas, the upgrade would represent at least a partial political victory that would underscore the relevance of his administration, as his Hamas rivals bask in the domestic triumph of their recent prisoner swap with Israel.

Hamas, backed by Syria and Iran and deeply hostile to Israel, said failure at the Security Council would prove the folly of the Abbas approach.

"He must return to national dialogue," said Sami Abu Zuhri, a Hamas spokesman. Abbas must implement an agreement concluded in May aimed at reuniting Gaza and the West Bank under one administration, he said.

Abbas is expected to meet Hamas leader Khaled Meshaal later this month to discuss reconciliation between the two major Palestinian movements, among other topics.

Officials say Abbas is expected to propose the idea of early elections to break the deadlock between them, though analysts say Hamas is unlikely to accept.

There is talk of other possible steps.

Abbas has raised the question of the future of the Palestinian Authority in recent weeks, reigniting a debate over whether a body set up as a state-in-waiting can survive without progress towards independence. Yet his aides dismiss any talk of dissolving the authority or of Abbas stepping down.

With little prospect of reconciliation, and a peace process in deep crisis, the United Nations seems the only path for Abbas to carve out some kind of achievement in the next few months.

Despite that, Palestinian analysts note his failure to say he is ready to go for a more modest upgrade at the U.N. They believe it is a sign of hesitancy that is probably the result of pressure he is facing from the United States and Israel.

The U.S. Congress has held up funds for the Palestinian Authority over the U.N. initiative, while Israel has decided to temporarily withhold tax revenues it collects for the Ramallah-based government, in response to its accession to UNESCO.

The tax haul represents half the authority's monthly revenue.

"He is in a very difficult position," said Hany al-Masri, a Palestinian commentator. "If there is Palestinian pressure he will go to the General Assembly," he said.

"To not do anything, is somewhat embarrassing. They have to keep up the momentum. If they don't do anything they would have to explain," said analyst George Giacaman.

"The choices are limited and difficult. The easiest choice would be to go to the General Assembly. At least a symbolic victory will be achieved."