GAZA CITY—Israel and Egypt began the blockade of the Gaza Strip three years ago in an effort to cripple Hamas, but the economic isolation has claimed a different victim: the territory's merchant class.

Western governments—including Washington—are clamoring for Israel to rethink its policy in the wake of last week's bloody seizure of a flotilla of activists attempting to reach Gaza's shore. Late last week, Israel signaled that it was considering ways of easing the flow of goods into Gaza.

Israel...