Israel has begun limiting fuel supplies to Gaza as part of punitive measures it is implementing in an attempt to stem the firing of rockets by militants from the coastal strip into Israel. But Palestinian leaders and human rights groups are warning the move could spark a humanitarian crisis.

Both Israeli and Palestinian officials confirmed that there was a reduction this week in the fuel supplies coming into the narrow strip, which is home to some 1.5 million Palestinians. Ahmed Ali, the deputy director of Gaza's Petroleum Authority, confirmed that shipments of diesel fuel and gasoline were 30 percent smaller than regular deliveries. Israeli officials said the reduction was smaller.

The move comes after Israeli defence minister Ehud Barak approved a plan last week to reduce power and fuel supplies to Gaza. And it comes in the wake of an escalation in the firing of rockets from Gaza by Palestinian militants at towns inside Israel.

"Because this is an entity that is hostile to us, there is no reason for us to supply them with electricity beyond the minimum required to prevent a crisis," said deputy defence minister Matan Vilnai. Last month, the Israeli government declared the Hamas-controlled Gaza Strip a "hostile entity".

Vilnai said the plan was "to begin gradually cutting the electricity supply without harming humanitarian sources like hospitals."

Israel supplies 120 of the 200 megawatts of electricity that Gazans use. Another 65 megawatts is produced at a local Palestinian power plant, and 17 megawatts are supplied by Egypt. While Israel began reducing the fuel supply on Sunday, the Israeli attorney general ruled that the government could not go ahead with reducing the power supply until it had studied further the humanitarian ramifications of such a move.

Some Israeli ministers suggested that with the continued firing of rockets, Israel was left with little choice but to take harsh measures. Infrastructure Minister Benjamin Ben-Eliezer pointed to repeated attempts by militants to target the main power station in Ashkelon, an Israeli town eight kilometres north of Gaza. Palestinian militants, said Ben-Eliezer, were "firing rockets at the same power station that provides them with electricity."

Israel has tried different measures in the past, including military forays into Gaza and air strikes on cars carrying militants, in a bid to stem the rocket fire. But militants have remained undeterred, continuing to fire their makeshift rockets into Israel.

The rockets have killed several people, but their impact has been largely psychological, sowing panic among residents in the southern Israeli town Sderot. During periods of heavy rocket fire, many of the town's residents have fled northward out of range of the rockets.

"We've had a situation where day after day, week after week, month after month, we've had rockets fired from Gaza by extremists, designed to kill our people," said foreign ministry spokesman Mark Regev. "The Israeli cabinet has decided that this situation just can't go on, and we will act to defend our citizens."

Israeli officials have said the plan is to reduce the quantity of fuel being transported into Gaza by five to 11 percent, but that this will not include fuel supplies to the main power plant in the strip. Prime Minister Ehud Olmert recently told Palestinian President Mahmoud Abbas that the punitive measures Israel is taking will not precipitate a humanitarian crisis in Gaza.

But, while militants in Gaza said the measures would not subdue them, Palestinian political leaders accused Israel of "war crimes", and called for international intervention to head off the humanitarian crisis they say will surely result from a cut in fuel and electricity supplies. Taher al-Nunu, a spokesman for Hamas in Gaza, called the decision "a crime against one-and-a-half million Palestinians living in Gaza."

Riyad Malki, spokesman for the Palestinian Authority in Ramallah, said the decision to cut fuel supplies was "catastrophic" and that it would "harm the Palestinian people and not Hamas. Hamas can get all the fuel it needs, but the Palestinian people will pay for it."

Since Hamas took Gaza by force earlier this year, Israel has followed a policy of trying to reward Palestinian moderates, like President Mahmoud Abbas who resides in the West Bank town of Ramallah, and punish the more hardline Hamas. But some in Israel have questioned whether the punitive measures will stop the rocket salvos. In the military, there are those who believe it will in fact spur more rocket attacks from militants bent on proving that Israel cannot stop them.

Deputy defence minister Vilnai has admitted he does not expect the rockets to suddenly stop falling. But he insists the new measures are not just meant as a deterrent but are part of a broader policy whereby Israel is continuing its disengagement from responsibility for Gaza.

International aid organisations and Israeli human rights groups say the new measures will worsen the already harsh situation in the strip. B'tselem, an Israeli rights group, has appealed to the High Court against the new sanctions.

"Cutting fuel supplies into Gaza will only exacerbate the humanitarian problems that already exist," said Sarit Michaeli, a spokesperson for the organisation. "Israel still exercises enormous control over Gaza. Therefore, it has obligations under international law to allow the normal running of everyday life."

John Ging, head of the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNWRA) in Gaza said that "the stated purpose of all of this is to...bring an end to rocket fire into Israel, which we repeatedly condemn. But doing it in this way, which is essentially collectively punishing the population for firing these rockets into Israel, will not succeed. In fact, we suspect it will engender more hostility among the population of Gaza."