"With our souls and blood, we sacrifice ourselves for Palestine," chanted the thousands who gathered in a central Ramallah square to watch Mahmoud Abbas make the biggest speech of his presidency.

But the crowd's pride as Abbas lodged a bid before the United Nations for Palestinian statehood was tempered by wariness stemming from the fierce opposition of the United States and Israel to any change in the international status of the Israeli-occupied West Bank and Gaza Strip.

"We have come to take part with our people in asking for our rights," said Mohammed Hamidat, 40, who watched events unfold on a giant screen with his wife and four children waving Palestinian flags.

"With the current closed horizons, it's the only thing we can do, even if the result is failure. It's been years since we have seen anything new: this is a first step."

Some contrasted President Barack Obama's threat to veto any Palestinian statehood presented to the U.N. Security Council, without a peace accord with Israel, with his support for popular uprisings in the Arab world.

"There's great pride. We are behind the president. Obama spoke about freedom in the Arab world but forgot that the Palestinian people are under occupation,' said Tawfiq Nimr, 63.

Loud cheers, whistles and applause erupted as Abbas handed the formal Palestinian statehood application to U.N. Secretary General Bank Ki-moon and waved it before the General Assembly.

"He was strong, the first Arab leader to challenge Obama. This is a historic moment in his life," said Badr Abdel Razeq, 35, who also brought his three children to witness the moment.

There was no sign of organised Palestinian violence in the West Bank, as feared by some Israelis who were worried Israel's opposition to the biggest Palestinian diplomatic initiative in years could trigger clashes with occupation security forces.

But one Palestinian man died after being shot by Israeli troops who intervened in a clash between villagers and Jewish settlers south of the West Bank city of Nablus.

Abbas noted the latest death in his speech, saying Jewish settler militancy could wreck hopes of a comprehensive peace.

Israel had raised its security alert level ahead of the U.N. speech. A military spokesman said armed forces were "trying to prepare for all kinds of eventualities". A police spokesman confirmed police strength had been boosted significantly.

Jewish settlers in the West Bank dismissed Abbas's speech ahead of the event and said it would make no difference to their determination to remain on land they consider their birthright.

"We don't care what they're up to at the U.N., we have the bible which says the land of Israel belongs to the Jewish people," said activist Meir Bartler, 25, on Thursday.

Avraham Binyamin, spokesman for Yitzhar settlement, near Nablus, said: "The real battlefield is not at the U.N., it's here on the ground and one hopes the government and security forces will understand, just as the Arabs and settlers have, that any talk of compromise is destined to fail."

Backing Israel's insistence that the two sides must resume suspended negotiations, Obama this week said there could be "no shortcut" to a Middle East peace that attempts to circumvent a treaty between the Palestinians and Israel.

But Palestinians say they have been patient during 20 years of peace talks that yielded nothing, while Israel's occupation continued and Jewish settlements expanded on West Bank land.

Gaza Opposed

The mood among the Palestinian leadership in the Gaza Strip, ruled by Islamists, contrasted starkly with the West Bank celebrations.

Ismail Haniyeh, leader of the Hamas movement which governs the enclave and refuses to recognise Israel, said Palestinians should not beg for a state. Liberation of Palestinian land should come first, he said.

Without a guaranteed "right of return" to land lost in the 1948 war which led to the creation of the Jewish state, "what is happening at the United Nations harms the dignity of our Palestinian people", Haniyeh said.

The outcome and potential side-effects of Abbas's statehood bid are far from clear.

"At the moment, it's a state on paper. We are still occupied," said Raymond Bosheh, 50. "I am with the move, but the consequences scare me," he said, noting Palestinian dependence on American aid and Israeli-controlled access to trade.

"The economy could play a big role. Many people have nothing. We are living on aid. The economy is not based on anything solid.

"Everybody takes pride in the idea of having a state but how can you live in it when you have to pass through three checkpoints to get to Bethlehem?"