NABI ELYAS, West Bank, April 26 (Reuters) - Linoy, a five-year-old Israeli girl, happily nibbled some chocolate as she accompanied her parents on a shopping spree on a busy street with storefront signs written in Hebrew.

Nabi Elyas, a Palestinian village in the occupied West Bank catering to the Israeli consumer, has raised hopes on both sides of a divide that peaceful co-existence is possible.

Just a short drive from central Israel, the community of 1,500 residents is profiting from an influx of Jewish shoppers drawn by cheap prices and still kept out of the main Palestinian cities by Israeli security regulations.

"Here I even feel safer than I do shopping in Tel Aviv," said Hanan Troitsa, Linoy's father. "We come here two to three times a week," added the girl's mother.

Groceries, furniture and even dental treatment are on offer in Nabi Elyas, which is packed with cars from Israel, especially during weekends. It's not a two-way street: villagers, like most other Palestinians, cannot get Israeli permits to visit Israel.

Security concerns during a Palestinian uprising that began in 2000 kept Israeli shoppers away for years and optimism about the chances for peace has long been in short supply.

But with attacks by militants on Israelis now rare in the West Bank, consumers are venturing back to an area once known as a bargain-hunter's paradise.

"This shows that we can live together. For those who do not believe it they should come here and see," said Jalal Khleif, the mayor of Nabi Elyas.

Israeli shopper David Dahan, from the Israeli town of Givat Shmuel near Tel Aviv, said Israeli and Palestinian leaders should follow the model of Nabi Elyas.

"We, the Palestinians and the Israelis can deal with each other in a friendly way. I personally have many friends here. If the politicians leave us alone we can run our affairs," said the 70-year-old pensioner.

Although business may be booming in Nabi Elyas, a new right-leaning government in Israel espousing an "economic peace" rather than territorial compromise have raised Palestinian fears their dreams of a state could be shattered.

Israelis point to the Gaza Strip, controlled by Hamas Islamists, and what many see as a weak pro-Western Palestinian government in the West Bank, as barriers to a peace deal.

Slicing mutton for Israeli customers, Omar Ali, a butcher in the village, is counting at least a partial peace dividend. He said his sales triple during weekends and Jewish holidays.

"There is good income when they come here," he said. (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to

blogs.reuters.com/axismundi

) (Editing by Richard Balmforth)