By Noah Browning

RAMALLAH, West Bank (Reuters) - Israel's electoral nudge to the center may limit Prime Minister Benjamin Netanyahu's freedom to set policy toward Iran and the Palestinians, but few in the Middle East expect a marked retreat from the premier's hawkish approach.

Tuesday's vote cost Netanyahu's bloc a quarter of its seats but still gave him and traditional allies on the right an edge over challengers to the left; defying expectations of a surge by religious hardliners, it handed second place to a new centrist party and prompted the premier to promise a broad coalition.

But despite demands from the center that he renew talks with the Palestinians and focus on curing domestic ills rather than threatening to attack Iran's nuclear program, few of Israel's neighbors saw much chance of Netanyahu changing his discourse.

"There isn't any center or center-right party which can change substantively the negotiating position with the Palestinians," said Rami Khouri at the American University of Beirut. "So I don't see any chance of breakthrough."

Michael Stephens at the Royal United Services Institute in Doha agreed: "It does not move the state of Israel closer to any sort of pragmatic government that Arab states can work with.

"There is too much baggage and little goodwill toward (Netanyahu) for the pendulum to swing towards a more favorable view of Israel anytime soon," he said.

Preliminary results gave the largest number of seats to Netanyahu's Likud-Israel Beitenu bloc, which has supported expanding settlements in the occupied West Bank. Jewish Home, whose charismatic leader Naftali Bennett has called for annexing West Bank land outright, gained seats at Likud's expense.

However, the surprise second place for centrist newcomer and former TV host Yair Lapid puts pressure on Netanyahu to bring him into a broader coalition and heed his calls for peace talks.

But in Ramallah, West Bank administrative base of the Palestinian Authority, the results failed to impress:

"Irrespective of the nature of the Israeli coalition or fabric of politics in Israel - who's in and who's out of office - the requirements for peace will not change," Saeb Erekat, the top Palestinian peace negotiator, told Reuters.

"To revive peace talks, Israel must stop settlement activity, release prisoners and end the occupation, withdrawing behind the 1967 borders and living side by side with the state of Palestine."

Samer Rantissi, a local engineer, was equally pessimistic: "What do the Jews' election have to do with us? We have lost hope that changes will arise from these elections," he said.

"We hope for peace, but it still looks far away."

PEACE STILL DISTANT

That view - which is shared by many Israelis, though they tend to blame Palestinians for the impasse - appeared to echo around the Middle East.

"Netanyahu's victory will not help solve the problem between the Arabs and Israel," said Marad al-Hamadi, 22, who runs a grocery store in the Yemeni capital Sanaa.

Laith Jassim, a mobile phone shop owner in the Iraqi capital Baghdad, agreed: "No matter who wins in Israeli elections, anyone who comes to power is against us".

Israel has occupied the West Bank and East Jerusalem since capturing them in the 1967 Middle East War. Successive left-wing and right-wing Israeli governments have allowed Jewish settlements to expand on the occupied territories ever since.

Their continued expansion was cited by Palestinians for the breakdown of direct peace talks with Israel in 2010. Israel says rockets from the Hamas-run Gaza Strip, and the schism between Hamas and the PA in the West Bank, have undermined relations.

European officials have particularly condemned the planned expansion of Israeli settlements in East Jerusalem following a successful Palestinian bid to have Palestine recognized as an "observer state" in the U.N. General Assembly on November 29.

IRAN

Netanyahu shrugged off his party's poor showing and immediately pledged to stop Iran from acquiring nuclear weapons.

He sees Tehran's nuclear program as a threat to Israel's existence. Iran denies any ambition to develop or acquire atomic weapons, saying its nuclear industry is purely civilian and that Israel, assumed to have nuclear armaments, is a threat to peace.

Meir Javedanfar, lecturer in Iranian politics at the Interdisciplinary Center at Herzliya in Israel, said Netanyahu will aim to ensure Western powers continue their pressure on Tehran, so his rhetoric is likely to remain hostile to Iran.

"It also serves as a distraction," said Javedanfar.

"Netanyahu believes that the more he says 'Iran', the less others say 'Palestine', which is exactly what he wants. A Palestinian state is not in Netanyahu's interest."

Abdelkhaleq Abdalla, a political scientist in the United Arab Emirates, did not see Netanyahu's stance against Iran as indicating a fully fledged plan to start bombing nuclear sites.

"He will play the game of exerting pressure on the Americans and international community to maintain the tight sanctions," Abdalla said. "But I don't see war coming in 2013."

Palestinian officials say Britain and other European states are looking into reviving peace talks in 2013 based on a Palestinian state on the 1967 lines with mutually agreed land swaps, but that no concrete proposal has yet been offered.

Palestinian misgivings toward Netanyahu are so deep that many officials doubt any government he leads can embrace change.

"If Netanyahu wants to deal with the international community - which I doubt - he might enter into a coalition with the Labour party or Lapid," said Mohammed Shtayyeh, a senior ally of President Mahmoud Abbas. But he added: "We don't see that (Netanyahu) is a partner for the peace process."

(Additional reporting by bureaux across the Middle East; Writing by Maria Golovnina; Editing by Alastair Macdonald)