By Maayan Lubell

JERUSALEM (Reuters) - Pressured by Washington, worried about its international standing and perturbed by Middle East turmoil, Israel had many reasons to return to peace talks with the Palestinians this week after a three year hiatus.

On the surface, Israelis saw little reason to jump back into negotiations. The status quo in the occupied Palestinian territories was holding and the question of the so-called peace process had largely fallen off the domestic political agenda.

But Prime Minister Benjamin Netanyahu may have realized he could not take the rap for cold shouldering U.S. efforts to revive the talks, and recognized that turbulent regional dynamics made it worthwhile to engage with the Palestinians once more.

"Resuming the diplomatic process at this time is important for the state of Israel both in order to try to end the conflict and given the complex reality in our region, especially the security challenges from Syria and Iran," Netanyahu told his cabinet on Sunday before it sanctioned the resumption of talks.

The last round of U.S.-brokered negotiations collapsed barely after they began in 2010 in a row over continued Jewish settlement building in the occupied West Bank and East Jerusalem on land the Palestinians want for their future state.

Although Netanyahu continues to reject Palestinian demands that he halt the construction, he has agreed to release 104 Arab prisoners as a goodwill gesture, drawing heavy criticism from rightist allies who say it will encourage terrorism.

The fact he made such a politically sensitive concession suggests he was put under enormous pressure by U.S. Secretary of State John Kerry, who visited the region six times in just five months to try to revive the long-moribund peace process.

"No one wanted to lose the blame game, so that's why we went to Washington," said Amos Yadlin, a former Israeli military intelligence chief who now heads the Institute for National Security Studies.

The same is true for Palestinian President Mahmoud Abbas, and that pressure could also produce progress: "Whoever botches the Americans' plans will have a price to pay," one Israeli official told Reuters on condition of anonymity.

CHAOS

However, U.S. arm-twisting alone does not fully explain Netanyahu's decision to head back to the negotiating table. Turmoil in the region also played an important role.

In the three years since the last failed effort, the Arab world has been turned upside down by uprisings that have transformed the Middle East.

With the outcome of the rebellion still unclear, notably in neighboring Syria and Egypt, many Israeli politicians have urged Netanyahu to do nothing and wait for the storm to pass, which appeared to be his preferred strategy until now.

But Itamar Rabinovich, a former Israeli ambassador to Washington, said the prime minister could not pretend that Israel was not a part of the Middle East and had to try to bring some calm and order to the chaos.

"Middle East instability has a complex, contradictory role. It is more difficult to make territorial concessions, but on the other hand, in a region that is undergoing such significant changes, Israel wants to be a player," he said.

"To do that it has to negotiate with the Palestinians."

Since the onset of the Arab world's popular revolts in late 2010, uncertainty has become almost the only thing Israel can rely on, bringing it short-term gains and long-term concerns.

Israel signed a peace treaty with Egypt three decades ago and had maintained a stable cold war with Syria for even longer, but the turmoil has hit both those big Arab nations hard.

Although Israeli officials have kept quiet about the latest upheavals in Egypt, there is no doubt they are relieved to see the return to prominence of the army in Cairo and the downfall of Islamist President Mohamed Mursi - which in turn undermines Israel's enemy Hamas, the militant group that rules Gaza.

Likewise the civil war in Syria means Israel has been able to sit back and watch the erosion of a once powerful foe.

However, the chaos has also allowed jihadi gunmen to build a presence along two previously dormant fronts and has sowed seeds of potential trouble in Jordan, the only Arab state to have signed a peace accord with Israel besides Egypt.

Against this backdrop, Yossi Beilin, an Israeli architect of the 1993 Oslo Accords with the Palestinians, said the time was right to try to end the decades-old Palestinian conflict.

"When around us you see all these crises, we might create with the Palestinians and the Jordanians and hopefully in the future with the Egyptians a group of peaceful countries which understand the importance of peace and cooperation and have an impact on the whole region," Beilin said.

IRAN

European Union diplomats have echoed this sentiment, and the 28-nation-bloc added to the pressure on Netanyahu to return to talks by announcing this month that it would bar financial aid to Israeli groups operating in the occupied territories - putting Israel on guard that its patience was running out.

"In the past few months the price of continuing the status quo has become much clearer to Netanyahu and in his third term he may be thinking of his legacy," said the former ambassador and peace negotiator Rabinovich.

When it comes to establishing a legacy, Netanyahu's allies say his primary focus has always been tackling Iran's atomic program. As he himself told his cabinet on Sunday, worries over Iran played directly into his Palestinian decision-making.

The Israeli leader has said for years that Iran is planning to build a nuclear bomb and warned that this represents an existential threat to the Jewish state.

Despite Tehran's denials, Netanyahu believes time is running out to deal with the issue. Israeli leaders have repeatedly said Washington must take the lead in halting Iran - either through military means, economic sanctions or diplomacy.

In this context, analysts said Israel could not risk rousing Washington's ire by spurning Kerry's extraordinary efforts.

"Netanyahu has Iran on his horizon and has made a very calculated move in order to guarantee some American support on more concrete, assertive steps in the Iranian matter," said Uzi Rabi, head of the Moshe Dayan Centre for Middle East Studies.

(Additional reporting by Dan Williams and Nidal al-Mughrabi in Gaza; Editing by Crispian Balmer; Editing by Peter Graff)