(Reuters) - Yitzhak Shamir, the hawkish Israeli leader who two decades ago first balked at U.S. calls to trade occupied land for Middle East peace, died on Saturday after a long illness. He was 96.

The second longest-serving prime minister after Israel´s founder, David Ben-Gurion, Shamir clung to the status quo. Admirers saw strength and resolve in his position, while critics called him an intransigent naysayer who allowed Arabs to cast Israel as obstructing reconciliation.

"Yitzhak Shamir belonged to the generation of giants that founded the State of Israel and fought for the freedom of the Jewish people in its own land," Prime Minister Benjamin Netanyahu said in a statement after his death.

Shamir professed a commitment to peace, calling it "the only prize ... that can justify any war," but insisted Israel never be rushed into a deal or lose its nerve.

"Big countries, I told myself, can afford to make mistakes; small ones cannot," he wrote in his memoir "Summing Up".

Born in Poland with the surname Yezernitzky, Shamir moved to British- ruled Palestine before the Holocaust, in which his family died. Steely and secretive, he ran missions against British and Arab targets for the hardline Jewish underground group Irgun, taking his Hebrew name from an alias used to evade police dragnets.

He later became a leader of another underground group, the Lehi, or Stern Gang. Captured and deported to Eritrea in 1946, the diminutive, beetle-browed Shamir missed much of the fighting that led to Israel´s founding two years later. Upon his return, he found himself out of step with the country´s left-leaning political leadership of the day.

The Mossad spy service provided Shamir a back door to power. Recruited in 1955, Shamir clambered up the Mossad´s ranks during shadow wars with regional foes and international hunts for Nazi fugitives.

He credited a posting in France with lending some refinement to his style - "the scenery, the way people looked, the food, the wine, Piaf," he reminisced - and prepared him for his 1980 breakthrough as foreign minister for the rightist Likud party.

Shamir was a mistrustful diplomat. Prime Minister Menachem Begin had signed a landmark peace accord with Egypt in 1979, yet Shamir bristled at Cairo´s insistence that Israel make way for Palestinian independence.

"Judea and Samaria are an integral part of the land of Israel, neither ´captured´ ... nor ´returnable´ to anyone," he said, using biblical terms for the occupied West Bank, which, along with the Gaza Strip, the Israelis had extensively settled, and where the Palestinians seek statehood.

Ruined by Israel´s 1982 Lebanon invasion, Begin resigned and was succeeded by Shamir, who would later enter an awkward coalition with Shimon Peres´ left-leaning Labour party in which the two leaders rotated the premiership between them.

It was a turbulent time. Shamir was forced to crack down on challenges from a new Jewish underground made up of West Bank settlers, who attacked Arab notables and plotted to bomb a Jerusalem mosque, and from the first Intifada, or Palestinian uprising, which erupted in 1987.

Rather than seek accommodation with the Palestinians, Shamir championed new settlements and the immigration of hundreds of thousands of Soviet and Ethiopian Jews in a bid to keep ahead of the growing Muslim population under Israeli rule.

Although known as a hardliner, Shamir nonetheless showed teeth- gritting restraint during the 1991 Gulf War. At the urging of the United States, he held Israel´s fire in the face of Scud missile salvoes by Iraqi dictator Saddam Hussein rather than retaliate and endanger the U.S. alliance with Arab powers battling to expel Iraq from Kuwait.

His forbearance on that occasion drove home Israel´s subordination to Washington´s Middle East interests.

"I can think of nothing that went more against my grain as a Jew and a Zionist, nothing more opposed to the ideology on which my life has been based, than the decision I took ... to ask the people of Israel to accept the burden of restraint," Shamir said later.

After the war, U.S. President George H.W. Bush called on Israel to accept multiparty peace talks with the Arabs. His administration hardened the demand by postponing $10 billion in U.S. loan guarantees that the Shamir government needed to absorb new immigrants.

Shamir hinted darkly that Bush, leader of the country´s most important ally, was an anti-Semite, but relented on attending the Madrid peace conference, where he became the first Israeli leader to sit opposite Palestinian, Syrian, Jordanian and Lebanese delegates.

The event was short on reconciliation - Shamir spoke of peace with only "self-government" for the Palestinians - but paved the way for the bilateral negotiations pursued by Labour´s Yitzhak Rabin, who rode a wave of Israeli optimism to defeat Shamir in a 1992 election.

The White House said in a statement: "Yitzhak Shamir dedicated his life to the State of Israel. From his days working for Israel´s independence to his service as Prime Minister, he strengthened Israel´s security and advanced the partnership between the United States and Israel. Our thoughts and prayers are with his family and the people of Israel."

Shamir was infirm and withdrawn from public life in later years. With Likud back in power and his former deputy foreign minister Netanyahu as premier, Israel remains at loggerheads with the Palestinians, with many disputes still festering.

"The truth is that, in the final analysis, the search for peace has always been a matter of who would tire of the struggle first, and blink," he wrote in his autobiography. (Editing by Roger Atwood and Doina Chiacu) (© Thomson Reuters 2012. 06/30/12)