By Alistair Thomson

DAKAR, March 13 (Reuters) - Palestinian President Mahmoud Abbas on Thursday accused Israel of "ethnic cleansing" in Arab East Jerusalem by banning the building of Palestinian homes and cutting the city off from the occupied West Bank.

Abbas told a summit of the 57-nation Organisation of the Islamic Conference (OIC), being held in Senegal's capital Dakar, the success of U.S.-brokered peace talks depended on Israel showing willingness to live up to the spirit of the process.

"Our people in the city (Jerusalem) are facing an ethnic cleansing campaign through a set of Israeli decisions such as imposing heavy taxes, banning construction and closing Palestinian institutions in addition to separating the city from the West Bank by the racist separation wall," Abbas said.

"What is taking place on the ground today is in total violation of (the peace process)," he said.

A spokesman for Israeli Prime Minister Ehud Olmert condemned Abbas's comments as inflammatory.

The future of Jerusalem, which Israel regards as its "complete and united capital" in a claim that has not been recognised internationally, is one of the most divisive issues facing Israeli and Palestinian negotiators.

Peace talks between Abbas and Israeli Prime Minister Ehud Olmert faltered late last year after Israel announced plans to build hundreds of new homes in and around East Jerusalem on land it occupied in a 1967 war.

Israel says the construction is within areas it intends to keep in any future peace deal with the Palestinians. It defends its construction of the West Bank barrier by saying it protects Israel from attackers, but the International Court of Justice has termed the project illegal.

OBSTACLES

Commenting on Abbas's remarks, Olmert spokesman Mark Regev said: "The peace process faces many obstacles and leadership should not be contributing to those obstacles through inflammatory statements."

Israel, Regev said, "is committed to a historic reconciliation with the Palestinian people, the government of the Palestinian Authority is our partner in that process and we have to work to build confidence and trust".

The Palestinians want East Jerusalem as the capital of a future state and fear Israel's building of settlements is an attempt to dilute their presence in the city and cut them off from the West Bank.

Palestinians in East Jerusalem complain of having to go through elaborate bureaucratic processes to get a building permit and believe the rules are meant to force them to leave the city. (For full Reuters Africa coverage and to have your say on the top issues, visit: http://africa.reuters.com/ ) (Writing by Nick Tattersall; editing by Andrew Roche)