AZA CITY, Gaza Strip (AP) -- Two years after Hamas seized power, the Gaza Strip is a jumble of absurdities: an economy sustained by smuggling through tunnels, a civil service that gets paid on condition it doesn't work, and a population no longer fearful of gangs but feeling muzzled under the thumb of Hamas.

Under a border closure enforced by Egypt and Israel, the U.N. says, shampoo can come in but conditioner can't. Nor can toys, candy or footballs.

The blockade was imposed on Gaza to drive the Islamic militants from power by cutting off all but basic humanitarian needs. Instead it has entrenched their power while forcing hundreds of thousands deeper into poverty and making Gaza more of an obstacle to any peace deal.

Voices calling for new thinking are growing louder, with the Obama administration arguing that squeezing ordinary Gazans is a recipe for instability. But there's no clear path forward, since opening the borders would require engaging the militants whom much of the world has shunned.

Meanwhile, the closure is making it impossible to rebuild Gaza after Israel's devastating winter offensive. It's also deepening the rift between the two territories that are supposed to comprise a future Palestinian state, with Hamas running Gaza while Western-backed President Mahmoud Abbas rules the West Bank.

And with each passing day, more jobs, opportunities and hope are lost.

"The pace of the downward spiral has accelerated so much and it's going to places where it will not be recoverable," said John Ging, the head of the U.N. agency whose food handouts sustain over two-thirds of Gaza's 1.4 million people.

The Gaza Strip is surrounded by fences and a heavily patrolled coast and Gazans aren't free to leave.

For all the negative effects of the blockade, there seem to be just enough escape valves to allow Hamas to sustain itself.

While Iran spends millions of dollars to keep Hamas afloat, the Abbas government has its influence: It pays tens of thousands of Gaza civil servants' salaries, provided the bureaucrats don't work for the Hamas government.

Hamas has made little attempt to impose Islamic restrictions. Even before the takeover, Gaza was deeply conservative and most Gazan women wore headscarves in a show of religious observance.

The main reason the boycott has failed to weaken Hamas is that ordinary Gazans blame Israel, not the militants, for their predicament - though it's unclear how Hamas would fare if elections were held today. The group has been able to keep smuggling weapons and cash through the tunnels to finance its operations, and now has 23,000 civil servants on its payroll.

Hamas has restored a sense of security, ending months of clan feuds and militia rule. Beaches are full, cops keep traffic flowing smoothly and Hamas police have replaced the often lawless gunmen who controlled the streets.

But Hamas' brand of order comes at a price. Human rights activist Khalil Abu Shammala said seven people have been killed and hundreds more tortured in Hamas custody since the war with Israel ended in January.

Abu Shammala, who lives in Gaza City, said Hamas has set up a network of neighborhood "monitors" to spy on ordinary people, who are increasingly afraid to speak their mind. With Hamas in control of the guns, a popular uprising against the group seems unlikely.

"Hamas is a power without law," said Abu Shammala.

Some Gazans manage to beat the sanctions. Carpenter Rabbah Yassin said he used cement smuggled through the tunnels to repair his war-damaged family home even though it cost him seven times the pre-blockade price.

But most of the estimated 250,000 people whose homes were damaged or destroyed have been unable to rebuild.

Five months after Israel launched its offensive to halt Hamas rocket fire, the Abed Rabbo neighborhood close to Israel's border looks just as it did on the day fighting stopped: mountains of rubble.

Amid the broken cement and uprooted trees, volunteers from the neighborhood, which now calls itself "camp dignity," sat in a circle outside a tent used for distributing donated bread. Little boys came on foot and bicycles to pick up their family's daily ration of three kilos (6 1/2 pounds) as the volunteers checked off names from a list.

"We've been in this situation since 1948 and we're still living on hope," said the group's leader, Fayez Abed Rabbo, alluding to Israel's creation and the Palestinian displacement it caused.

Israel invaded Gaza to stop the rocket fire that had been hitting Israeli towns and villages for eight years, but the attacks continue sporadically, and Israeli government spokesman Mark Regev says it's a reason to maintain the blockade.

"Israeli sanctions on Gaza are a response to the continuing violence from Gaza into Israel," he said, but added: "The Cabinet is looking into additional ways of easing life for the Palestinian population of Gaza while preserving Israel's security interests."

Gaza's fate remains mired in a political deadlock that began in June 2007, when Hamas' outnumbered but disciplined fighters overpowered Abbas' Fatah forces.

The Obama administration has urged easing the embargo. But Israel is linking open borders to the fate of Gilad Schalit, an Israeli soldier held by Hamas, while Hamas wants to trade him for hundreds of Palestinian prisoners held by Israel.

Hamas, viewed as a terrorist organization by much of the world, is refusing to heed the international demands that would open Gaza's borders: recognizing Israel and renouncing violence.

Hamas leaders have lately been signaling they would accept a Palestinian state in just the West Bank, Gaza and east Jerusalem, territories Israel captured in the 1967 Mideast war.

Ghazi Hamad, a Hamas official, said that when Jimmy Carter visited Gaza this month, he told the former president that "we are not against building the state in the '67 borders, and we support the cease-fire, and we support the exchange of the prisoners." Carter said he would brief President Barack Obama.

Still, Hamad, like other Hamas officials, refused to say whether this state would be permanent or just a step toward destroying Israel - and the group's refusal to recognize Israel has emerged as the main sticking point in Egyptian-brokered efforts to get Hamas and Fatah to reconcile.

Most Gazans are preoccupied these days with getting basic needs.

Israel only lets in medicines, food staples and other basic goods, banning anything deemed luxurious.

At a news conference marking two years of the closure, Chris Gunness, a U.N. spokesman, held up a bottle of two-in-one shampoo and noted that it is not allowed to enter Gaza because it also contains conditioner, a banned item.

So is cement, which means that U.N. plans to spend $371 million to repair war-damaged homes are on hold. It also means newlyweds have no space of their own because families can't build new bedrooms in their clan compounds.

Gaza importer Ala Hamada, 30, said he ordered 24 containers with tea, tomato paste and powdered drinks and all have sat in Israel's Ashdod port for months. He pays $500 per container for storage each month, and many of the goods are close to their expiration date.

Having waged war on Hamas, he said, "now they make war on the businessman."