HEBRON, West Bank (Reuters) - On an ancient hill dotted with 1,000-year-old olive trees, Israelis are busy excavating in search of the first palace of King David in the heart of the West Bank.

The Jewish settlers who started the dig with the help of Israel's Antiquities Authority say they want to turn it into an archaeological park to celebrate its historical significance.

But for Palestinians who hope the West Bank will someday form part of a Palestinian Sstate, the move is a grab not only for land but also for their past - a ploy to cut them out of history and away from land they say is rightfully theirs.

The Bible says David, the second king of the United Kingdom of Israel and Judah, first ruled in Hebron before conquering Jerusalem to the north.

"You come to see where King David started his first palace, it blows you away. I don't know, it blows me away!" said David Wilder, spokesman for the Jewish community in Hebron.

The dig, located on a plot of Jewish-owned land that is part of an island of 500 settlers among some 250,000 Palestinians, takes place under the protective eyes of Israeli soldiers toting automatic weapons.

Most countries consider the settlements Israel has built on land captured in the 1967 Middle East war as illegal, and Palestinians fear the enclaves will deny them a viable state made up of East Jerusalem, the West Bank and Gaza.

The promotion of archaeological sites on this disputed land goes to the heart of the most explosive issues in Israel-Palestinian peace talks being brokered by Washington - building on occupied land, the status of Jerusalem and the future of Israel as a "Jewish state".

"I want people to visit Hebron and leave with the cultural and religious significance of the site to the Jewish people, the state of Israel and people around the world," Wilder said.

"You don't live in the past, but the past is an arrow showing where you've come from and where you can go to."

Shuaib al-Tamimi, a 22-year-old Palestinian watching the excavation from behind a new chain-link fence around the site next to his family home, voiced his contempt for the plan.

"Of course there are antiquities here, Roman antiquities. To say Solomon's palace or whatever was here is a conspiracy and a big lie," he said.

"They come and plant the stones here, just to serve their own interests and take away our rights."

"JUDAISING"

The first big marriage of settlement and archaeology tourism was the "City of David" theme park in occupied East Jerusalem, where densely packed Arab homes stand cheek-by-jowl with settler houses, surveillance cameras and private security guards.

Many of the homes are subject to demolition as they were built without Israeli government permits, which can be difficult for Palestinians to obtain.

The City of David welcomes Israeli school children, soldiers and evangelical Christians, among others, to the purported location of another of David's palaces, which scholars believe is the Holy City's oldest inhabited area.

Israel cites such roots in laying its claim to all of Jerusalem, including the eastern area captured in 1967, and in designating the city its "eternal and indivisible capital".

The pro-settler organisation Elad owns much of the land on which the City of David is located, including several houses for Israeli settlers that are scattered next to the ruins.

Since Jan. 12, Israel has started extending the area of the park with a new Israeli dig on its fringes, drawing the anger and frustration of Palestinians who lack the authority to do anything about it.

Demolition orders were also given to eight Palestinian structures in the same neighbourhood, around a plot slated by Jerusalem's Israeli-run municipality for a Bible-themed park and shopping area called "The King's Garden".

Activist groups have gone to court to challenge the way the City of David is run - it is managed by the Israeli Parks Authority as a national park but operated by Elad.

"It was our claim that a private political and very right-wing organisation misused these powers to advance its political agenda, part of which is to Judaise East Jerusalem," said Michael Sfard, an Israeli lawyer involved in the legal action.

The court threw out the petition, but the parks authority promised to review how the site is operated.

EXISTENTIAL QUESTION

In the West Bank hills north of Jerusalem, Judy Simon stands by a modest ruin and ancient oak at Beit El settlement, where the Bible says the patriarch Jacob dreamt of a ladder reaching to heaven, making the spot, she says, "a connection between heaven and earth".

Wearing a head scarf in the manner of Orthodox Judaism, Simon, who is the settlement's tourism manager, reads Hebrew Bible verses, slowly closing the book and kissing it.

"We read here that the Land of Israel was promised to Abraham and Jacob... and the irony is that, today, it's considered disputed," she said.

Her tours around the site aim to impress upon visitors the centrality of the West Bank to Jews' religion and history.

Palestinians' own efforts to showcase their past are stymied by their lack of direct control over around two-thirds of the West Bank, as well as a lack of cash and internal political divisions that push the issue deep down the list of priorities.

However one attempt has been made in the Palestinian village of Beitin, which scholars say preserves the Biblical name of Beit El next door. Excavations begun late last year are hoped to turn the remains of a Byzantine monastery and medieval mosque into a tourist site.

"We think archaeology is being used as a cover for settlement policy, and (Israel's) lack of coordination with Palestinian authorities is a political decision," said Hamdan Taha, head of the Palestinian Authority's Department of Antiquities in Ramallah.

"We intend to present the cultural history of Palestine, whether Jewish, Christian or Muslim, as an integral whole, while one-sided excavations in Hebron and Jerusalem will only deepen the conflict and make a negotiated solution harder."

Simon, in Beit El, said she thinks Israel should annex the West Bank and give Palestinians full citizenship, but maintain the state's Jewish character. The settlement issue for her is an existential question of Jews' past and future.

"What kind of peace would it be if we're made to leave our homes?" she said.

(Editing by Jeffrey Heller and Sonya Hepinstall)