By Nidal al-Mughrabi

GAZA, July 19 (Reuters) - Palestinians in the Gaza Strip are reeling from another devastating blockade but this time they are blaming Egypt, the neighbouring Arab power they once hoped would end their isolation, rather than their old foe Israel.

In a few weeks of digging, dynamiting and drenching, Cairo's troops have destroyed many of the smuggling tunnels that ran under the Egypt-Gaza border and which had provided the cramped coastal enclave with commercial goods as well as weaponry.

The Islamist Hamas government, which taxes much of the traffic through the underground passages, has been hit hard by the losses. Ordinary Palestinians, many of them dependent on U.N. aid handouts, have seen prices for staple goods skyrocket.

"There is a difficult humanitarian situation in Gaza because of the Egyptian measures on the borders," said Hamas spokesman Sami Abu Zuhri. "Most of the tunnels were demolished and the few that remain open are paralysed."

He likened the crisis to 2007, when Israel, responding to the Hamas takeover of Gaza in a brief civil war with Western-backed Palestinian rivals, clamped down on the territory.

Israel still maintains a strict control of all imports into Gaza to prevent arms reaching Hamas, which refuses to recognise the Jewish state and has often clashed with it. Under international accords, merchandise cannot be imported via Egypt.

Cairo mobilised against the tunnels after jihadi militants in the Egyptian Sinai desert killed 16 of its soldiers a year ago. Egypt said some of the gunmen had slipped into Sinai from nearby Gaza, an accusation denied by Hamas.

The tunnel crackdown has gathered pace since the Egyptian military removed Islamist President Mohamed Mursi from power this month. Mursi's short-lived rule had already disappointed Hamas, since despite their shared ideology he appeared in no rush to open the Gaza border.

With Mursi now gone, Hamas openly despairs - not least as it has also parted ways with insurgency-hit Syrian President Bashar al-Assad, who had long hosted the Palestinian faction's foreign headquarters, and lost key funding from Damascus's ally Iran.

10 PERCENT OF GDP LOST

Ala Al-Rafati, the Hamas economy minister, said tunnel closures since June had cost Gaza around $230 million - around a tenth of the GDP of the territory, whose 1.7 million residents suffer more than 30 percent unemployment.

"The continued restrictions threaten to bring construction projects to a complete halt," he said, referring to cement that has been brought through the tunnels, along with everything from foodstuffs to electrical appliances to the occasional car.

An Egyptian official who spoke to Reuters on condition of anonymity said the anti-tunnel campaign was only for security needs: "There are elements that use these tunnels to inflict harm on Egyptian and Palestinians on both sides of the border."

Ehud Yaari, a Middle East analyst from Israel who has studied the Sinai situation in depth, said that while Egypt had stemmed the flow of weapons into Gaza, it was permitting a measured flow of commercial goods to prevent massive shortfalls.

"When the Egyptians felt there was a shortage of fuel in Gaza, they allowed certain tunnels that carry fuel in to operate for a few days. They are very sensitive to the situation inside Gaza," Yaari said - an observation the Egyptian official declined to confirm or deny.

A diplomat who monitors Gaza agreed that the tunnel closures posed a strategic setback to Hamas's rocket arsenal, which was targeted in an aerial blitz by Israel last November.

Though Hamas has largely observed an Egyptian-brokered ceasefire since then, and kept smaller Gaza factions to the deal as well, the diplomat, who asked not to be identified, predicted that the Islamists would redouble local production of weaponry and try to circumvent the tunnel closures.

"Longer, deeper and well-hidden tunnels could be one of those ways," he said.

Abu Zuhri said Hamas's first concern was providing for the Palestinians' day-to-day needs.

"We are capable of creating alternatives to contend with any crisis," he said. "The ongoing closure of tunnels without making an alternative is practically strangling Gaza."

Hamas has repeatedly but fruitlessly urged Egypt to allow goods to enter through a land corridor. Indeed, at Rafah, the sole passenger terminal on the border, Egypt was on Sunday restricting passage to compassionate cases only. Even that was an improvement on frequent periods in which Rafah was shuttered.

"We are aware of the humanitarian needs in the Gaza Strip, and Rafah crossing opens for those who need to travel," the Egyptian official said. "We want people in Gaza to be assured Egypt will never abandon their side and will always be a major supporter of the Palestinian national cause." (Editing by Dan Williams/Mark Heinrich)