GAZA, Oct 23 (Reuters) - The Emir of Qatar embraced the Hamas leadership of Gaza on Tuesday with an official visit that broke the isolation of the Palestinian Islamist movement, to the dismay of Israel and rival, Western-backed Palestinian leaders.

Israel said it was "astounding" that Qatar, a U.S.-allied Gulf state whose oil and gas permit it to punch way above its diplomatic weight, would take sides in the Palestinian dispute and endorse Hamas, branded as terrorists in the West. The Emir had "thrown peace under the bus", an Israeli spokesman said.

But some analysts saw a daring move, aimed at rehabilitating Hamas in Western eyes in order to coax it into the peace camp at a time when the Arab Spring revolts, and civil war in Syria, have been reshaping power balances across the Middle East.

The Emir, who is rare among Arab rulers in having met senior Israeli officials, denounced Israel's policies and praised people in Gaza for standing up to it with "bare chests" - but he also urged rival Palestinian leaders to abandon their feuds.

The Gaza Strip is all but cut off from the world under a land and sea blockade by Israel and Egypt that is intended to obstruct the import of arms to Hamas. A Sunni Islamist group like several others supported by Qatar elsewhere, it has long been aided by Shi'ite Iran and its allies Syria and Hezbollah.

In the Israeli-occupied West Bank, the Palestinian Authority of President Mahmoud Abbas, Hamas's arch-rival, said it hoped the Qatari visit would not hinder the rebuilding of Palestinian unity, nor endorse a separate Palestinian territory in Gaza.

Embarking on what was a state visit in all but name, Sheikh Hamad bin Khalifa al-Thani and his wife Sheikha Mozah crossed from Egypt at the head of a large delegation, to be greeted by Hamas Prime Minister Ismail Haniyeh and an honour guard.

Hundreds of Palestinians lined his route, waving Palestinian and Qatari flags as the Emir's black Mercedes limousine bumped along the rutted main highway Qatar has promised to rebuild.

"Today we declare victory over the blockade through this historic visit," Haniyeh told the Qatari monarch in a speech at the site of a new town to be built with the emirate's money. "Thank you Emir, thank you Qatar, for this noble Arab stance ... Hail to the blood of martyrs that brought us to this moment."

Hamas, whose suicide bombing campaign against Israel was at a peak a decade ago, rejects a peace treaty and has poured scorn on Abbas for his efforts to negotiate his way to a Palestinian state. That peace process with Israel is stalled.

Sheikh Hamad slammed Israeli settlement in the West Bank and East Jerusalem. "The Palestinian cause ... remains a bleeding wound in the Arab body as Israel continues every day to change the face of Palestinian land through its settlement activities and Judaisation in the occupied West Bank and especially in Jerusalem," he told an audience at Gaza's Islamic University.

But he blamed some of the failure on Palestinian in-fighting, which had undermined "resistance". "Surely you realise that your division is the source of greater harm to your cause and the cause of all Arabs," he said. "It is time you end the chapter of differences and open a wide chapter for reconciliation."

QATAR STRATEGY

This was the first visit to Gaza by any national leader since Hamas seized control of the enclave where 1.7 million people live from Abbas's forces in 2007. Israel had pulled out its troops and settlers from the territory two years earlier.

Qatar has called the visit a humanitarian gesture, to inaugurate reconstruction projects financed by the emirate. After initially earmarking $250 million for the schemes, a smiling Haniyeh announced the fund now stood at $400 million.

In Washington, State Department spokeswoman Victoria Nuland said the United States was concerned about the "destabilising" role of Hamas in the region.

"The Qataris have described this as a humanitarian mission," she said. "We would hope that the opportunity was taken to make clear the importance of Palestinians and Israelis talking to each other."

Ghanem Nuseibeh of London-based consultancy Cornerstone Global said: "Qatar now is directly involving itself in the Palestinian issue. It is certainly a bold step that goes beyond what any other country in the region would have done..."

"Qatar is acting as a go-between between the West and Hamas. Though both the West and Hamas prefer not to admit this, both in fact are eager for someone to assume such a role. Only Qatar is able to do so given its regional status, and it's doing it through economic diplomacy."

The tiny Gulf emirate, sandwiched between a hostile Iran and its touchy Sunni neighbour Saudi Arabia, has ambitions to use its vast natural gas wealth to strengthen its diplomatic influence. It hosts major U.S. military bases and will hold the soccer World Cup finals in 2022. But it was also a major supporter of Sunni Islamist groups, some hostile to the West, who were big beneficiaries of last year's Arab Spring revolts.

Though giving up none of his absolute power as monarch at home, the Qatari ruler has also aided criticism of other Arab rulers through Qatar's establishment of Al Jazeera television.

Qatar helped arm and fund Libya's successful, Western-backed rebels and many believe it is helping Syria's opposition in a similar way. But its dual policy has perplexed some foreign powers, with its strong support for Islamist groups, including Hamas, running in parallel with close ties to the United States.

Analysts in Gaza also saw the visit as an attempt by the Emir to use his leverage with Western capitals to help Hamas out of isolation and move them into mainstream politics, using their falling out with Shi'ite Iran over the conflict in Syria as a stepping stone to break Tehran's influence on them for good.

Among signs of Hamas's shifting focus was the move of exiled leaders this year from Damascus to the Qatari capital Doha.

The Gaza Strip unquestionably needs the reconstruction aid Qatar is now going to provide. Little has been repaired in Gaza since a devastating three-week offensive by Israeli forces in the winter of 2008-2009 to stop Hamas and other groups firing rockets and mortars at southern Israeli communities.

The visit coincided with another round in the low-level Gaza conflict. An Israeli officer was badly injured by an explosion on the border and Prime Minister Benjamin Netanyahu promised a "strong response", which often means Israeli air strikes.

"NO SIGN" OF HAMAS CHANGE

Israeli foreign ministry spokesman Yigal Palmor said the Qatari ruler had never visited Abbas's Palestinian Authority.

"No one understands why he would fund an organisation which has become notorious with committing suicide bombings and firing rockets on civilians. By hugging Hamas, the Emir of Qatar is really someone who has thrown peace under the bus," he said.

Eli Avidar, who once ran Israel's diplomatic mission in Doha - a rarity in the Arab world - told Israel Radio: "The policy of this emir is to play both angles simultaneously."

Western governments have shunned contact with Hamas. Palmor said in answer to a question that Qatar had not cleared the visit with Israel in advance. But word of the Emir's travel plans had been aired in Arab media for the past two weeks.

Hamas refuses to renounce violence or recognise Israel's right to exist and is ostracised by Quartet of mediators, comprising the United Nations, United States, European Union and Russia. However, Hamas has softened its position to a degree, by saying it would accept a truce with Israel in return for a state in borders left by violent partition in 1948.

It also denies any desire to create a separate state in Gaza, a 40-km (25-mile) sliver of coastline with few resources.