When it opened its doors seven years ago, the European Gaza hospital was one of the biggest foreign investments in the long-troubled Gaza Strip and one of the leading medical centres in the Palestinian territories. Yesterday, the 250-bed hospital was sliding rapidly into crisis, turning away patients for routine operations and struggling to manage emergency cases, as the sole power plant in Gaza halted electricity production after Israel stopped all fuel supplies.

Israel said its closure of the Gaza strip was intended to halt the firing of makeshift rockets by Palestinian militants into southern Israel.

Yet Israel's stark new policy has meant no fuel or food aid has come into Gaza since last Thursday. Large parts of the overcrowded strip had no power, leaving it without lights and heating, closing bakeries and forcing hospitals to rely on generators and their own limited fuel reserves. As night fell nearly all Gaza City was in darkness. Simply put, it was "collective punishment," said the European commissioner for external relations, Benita Ferrero-Waldner.

Osama Nahal, a paediatric doctor in the European hospital's special care baby unit, looked resigned. "Politics is politics, but the care of human beings must be away from politics," he said. His unit now has 10 newly-born patients, of whom two are on ventilators.

The hospital in Khan Yunis, which was built with European and UN funding, takes most of its electricity from the power plant, so it was largely without any yesterday. The hospital's own fuel reserves, normally 120,000 litres, are down to 10,000 litres following Israel's economic boycott of Gaza over the past two years.

The UN sent emergency fuel supplies from its depot inside Gaza. It was enough to power the hospital's smallest generator and to provide electricity for the intensive care units and emergency operations. But when those last reserves run dry, the power will stop. "If new supplies don't come, we'll have to put the patients on manual ventilation. All of us will have to work at it non-stop, 24-hours a day," said Nahal.

"It's a very serious situation. If it continues, we will stop being able to give our service," said Mohammad Abu Shahla, the hospital director. "Do you think we have anywhere else to move the patients? There is nowhere."

Even with Gaza's power plant, which supplies around a quarter of the strip's electricity, closed, Israel yesterday at first appeared intent on holding to its closure policy. "As far as I'm concerned, all the residents of Gaza can walk and have no fuel for their cars, because they have a murderous terrorist regime that doesn't allow people in the south of Israel to live in peace," said the Israeli prime minister, Ehud Olmert.

Last night, however, the defence minister, Ehud Barak, decided to allow one-off shipments of diesel and medicine into Gaza beginning today.

"We think Hamas got the message," said Arye Mekel, a foreign ministry spokesman. "When they want to stop the rockets they can." It was not clear how much fuel would be allowed in, or how regular the shipments would be.

The case of the increasingly desperate humanitarian crisis in the Gaza Strip has been often told and often ignored in the two years since the Islamist movement Hamas won the Palestinian elections and then seized full control of Gaza last summer. But never before have the warnings of the fragility of the strip's 1.5 million people been so stark.

Yesterday, the UN Relief and Works Agency, which works with Palestinian refugees and provides crucial food aid to 870,000 Gazans, warned that it would have to stop distributing its food support by tomorrow or Thursday because it could not import the bags or the fuel to deliver the food.

Israeli officials have said they believe officials in Gaza had shut down the power plant unnecessarily.

However, John Ging, the director of UNRWA's operations in Gaza, said the crisis was acutely real. "The representative of the government of Israel making such a statement is obviously misinformed about the reality here," he said. "It is a matter of fact that the power plant has run out of fuel. The government of Israel knows very well to the last litre what comes into Gaza. They control everything."

Ging said the rocket fire from Gaza, though illegal, did not justify such punitive measures against the civilian population, and the Israeli civilian population hit by the rockets, notably in Sderot near the boundary with Gaza, also deserved protection.

"Firing rockets from Gaza is not supported by the population here," he said. "One's actions must be measured against the rule of law. We should look at each action and hold accountable those who are actually committing them."

Israeli military incursions and air strikes have killed nearly 40 Palestinians in Gaza in the past week, at least 10 of them civilians. Palestinian militants shot dead an Ecuadorian kibbutz volunteer last week and fired more than a 160 rockets into southern Israel, although the number fell after the closure.

As night fell yesterday a crowd of shoppers crammed into Samir Khadr's bakery in Gaza City, one of the few shops with the luxury of its own generator. Khadr had enough fuel to last just one more day. "Israel is the one responsible for this. We're more fed up with the rockets than they are," he said. "We have no electricity, no fuel, no cooking gas, just candles. It's going to be miserable."

Backstory:

Gaza has only one power plant, supplying around a quarter of the electricity used by the strip's 1.5 million people. The rest is bought mostly from Israel, and from Egypt. When Israel imposed a full closure on Gaza's crossings on Friday, all fuel supplies to the power plant were stopped. On Sunday evening the plant halted production. Both of its 10,000-cubic-metre storage tanks are now empty. Even before the latest closure, Israel was limiting fuel supplies, which kept production down to around 55 megawatts, a long way short of the 140MW that the plant was built to produce.