To the rest of the world it was just another match in the blizzard of international fixtures, the first hurdle for two footballing minnows on the long road to qualification to the London Olympics. But in Ramallah, Palestine's meeting with Thailand assumed far greater importance.

Forty-nine years after the Palestinian FA's formation and 13 since it was formally recognised by Fifa, this game was the first competitive international match ever played on Palestinian soil. Before the kickoff the players knelt and kissed the pitch, venerating the soil on which they were finally allowed to play.

With big screens catering for 10,000 hopeful fans outside, 17,000 crammed into the Faisal al-Husseini stadium in Ram, north of Jerusalem, which four years ago was used as a parking lot for Israeli tanks during its campaign of West Bank incursions. Just 100m from the stadium gates lies the West Bank barrier, a reminder of the tensions that rupture the occupied territories.

Jibril Rajoub, president of the Palestinian FA, said: "For us it is a historic event and we are committed to bringing it a humanitarian dimension." Rajoub, a member of the Fatah central committee and seen as a potential future president, also heads Palestine's national Olympic committee. He recognises the importance of sport as a symbol of statehood.

"We cannot exclude ourselves from the political aspect of this event. We are looking to expose Palestine as a cause to the world through the ethics and values of sport," he said. "Sport can pave the way to statehood for Palestine."

The Palestinian prime minister, Salman Fayyad, welcomed the game. "It is an important symbol," he said. "The national football team is a symbol of its country. For us Palestinians this is of enormous significance."

For the players, who earn $3,000 a year and live in basic dormitories in the eaves of the stadium, the expectation weighed heavily. "We have 100% responsibility to play this game and put a smile on the face of each Palestinian, wherever in the world they are," said defender Nadeem Basem Barghot, pointing to the huge Palestinian diaspora, who he said would be tuning in for the match.

The main problem facing the Palestine team is the travel restrictions for players living outside the West Bank, he said. Israel denied permission to eight Gaza-based players to make the short journey to Ramallah for this match (four were permitted to pass), while the team's Tunisian coach, Mokhatar Tilili, was delayed at the Jordanian border for 24 hours and only allowed to cross on the eve of the match.

"Because we don't meet all the time it is hard to create a proper harmony between the team," Barghoty said.

Jacques Rogge, the International Olympic Committee president, chaired talks between the Israeli and Palestinian committees in February aimed at fostering better co-operation and ending such restrictions. More talks are due in May.

In the end it was all a bit too much for the Palestine players, who lost 6-5 on penalties, having won 1-0 on the night, following an earlier 0-1 defeat away to Thailand in the first leg. Abdulhamid Abuhabib from Gaza scored the only goal with a rasping volley into the corner of the net shortly before half-time.

"Today was a political victory, but I wish it was a football victory too," said the team's every so slightly dejected coach. As rain and hail swirled around the stadium, the crowd thinned out. The prime minister went on a walkabout, joining journalists in the press box, then talking with fans. "If it goes to penalties I'll be too nervous," he joked. "I'll look the other way."

Twice Abuhabib might have won it, sending a powerful diving header wide with the goal at his mercy, and an overhead kick over the crossbar with the last kick of extra time.

But it was penalty kicks that were Palestine's undoing: after scoring their first five, they failed to convert either of their sudden death kicks and Thailand went through to the next stage.

"This is only the start," mused one Palestinian FA official afterwards. "There will be many other games."