Ratcheting up pressure on Palestinians in the Hamas-controlled Gaza Strip, Israel prepared to cut electricity supplies to Gazans in retaliation for an escalation in cross-border rocket and mortar attacks by Palestinian militants.

After declaring Gaza an "enemy entity" in September, Israel has kept Gaza's borders sealed save for humanitarian foodstuffs and medicines. The policy has triggered dramatic inflation, shuttered businesses, and spurred demand for black-market goods smuggled through tunnels that were once used by gun runners and drug dealers.

"The market now takes all food that you smuggle, also spare parts and medication," says Hashem, a tunnel-owner from the border town of Rafah who spoke on the condition that his last name not be used.

Analysts say the goal of Israel's policy of isolating Gaza seems to be to pressure Gazans to turn against Hamas, which has led the area since it wrested control from the Palestinian Authority in June. Other observers warn that the pressure is likely to backfire, creating more volunteers for militant groups and stirring sympathy for Hamas.

The squeeze comes as the Palestinian Authority and Israel negotiate a joint statement on the framework of peace negotiations, a document scheduled to be a centerpiece of a regional meeting in Annapolis, Md., scheduled for late fall.

"The economy is just not functioning. People who are suffering, are being deprived of the right to work, and are dependant on religious charities are not going to become more moderate," says Sari Bashi, the executive director of Gisha, a Tel Aviv-based nonprofit that focuses on alleviating movement restrictions on Palestinians. In the four months since Hamas has taken over, Israel has allowed almost no finished goods or produce to leave the Gaza Strip. With the onset of the winter picking season for Gaza's strawberries and cherry tomatoes, millions of dollars' worth of products are expected to rot.

In order to compensate for the high price of petrol, Gazan auto mechanics are installing equipment that will allow car motors to burn cooking gas. But to say that the economy has shifted to a black market because of the tunnels would overestimate the tunnels' capacity to compensate for traffic over the Israeli border. "These are extreme conditions," says Ms. Bashi.

Israeli Deputy Defense Minister Matan Vilanai told Israel Army Radio on Wednesday about plans to reduce "dramatically" – by about two-thirds – the power that is supplied to the Gaza Strip. The comments followed a day in which 10 rockets were fired from Gaza into Israel, one hitting a residential building in the frequently targeted town of Sderot.

Israeli Foreign Ministry spokesman Mark Regev defended the sanctions, saying that because Hamas has demonstrated its ability to reduce chaos in the Gaza Strip, Israel is being less forgiving in adopting blanket sanctions.

"If one wants to talk about exports from Gaza to Israel, the only export today is mortar shells and Qassam rockets. When we declared Gaza a hostile entity, we were actually just describing reality, which is that an extremist terrorist entity has taken control of Gaza," he says. "Can anyone expect that Israel would continue a business-as-usual policy with Gaza? On the contrary, business as usual is impossible."

Since Hamas took over, the group has attempted to regulate the smuggling of illicit goods. "Hamas said you can smuggle anything except weapons and drugs," tunnel smuggler Hashem says. He has shifted from moving AK-47s and bullets to cheese, salted fish, and painkillers.

Israeli officials say intelligence reports indicate that sophisticated antitank weapons and rockets still flow into Gaza.

Up and down the coast, Israel's policy of blocking imports has left store shelves so bare that it's impossible to find a can of soda. The price of cigarettes has doubled, pushed up also by a tax that Hamas charges the smugglers. The price of 50-kg (110-lb.) sacks of flour rose 80 percent to 180 shekels ($45).

An absence of raw materials has forced most businesses to close, or work at minimum capacity; the lack of cement has silenced 95 percent of the building projects in Gaza. According to United Nations agencies, some 70,000 people have lost their jobs in a territory where 80 percent already live in poverty.

In the last week, there's also been a spike in internal violence in the Gaza Strip. Hamas gunmen have waged separate clashes with Islamic Jihad fighters for control of a mosque in the border town of Gaza, as well as with gunmen from the Fatah-allied Hillis clan in Gaza City.

Munir Dweik, a cab driver who spends most of his days waiting for customers on the Palestinian side of the northern Gaza Erez crossing, says that although the clashes were not directly related to the economic sanctions, Gazans overall have become more prone to violence.

But instead of blaming just Hamas for the conditions in Gaza, fingers are pointing at Palestinian President Mahmoud Abbas, also called Abu Mazen, for contributing to the air of crisis. Many Gazans believe that the Fata-run government in Ramallah has given tacit support to the sanctions. "People are blaming both governments – in Ramallah and Gaza," he says. "People are victims of the Abu Mazen and the Hamas governments."