* Weakened Hamas shows off military hardware in parade

* Israel, militants trade slap-for-slap blows

By Nidal al-Mughrabi

GAZA, Nov 14 (Reuters) - The Palestinian Islamist movement Hamas looked to project an image of strength in Gaza on Thursday, organising one of its largest ever military parades to mark the first anniversary of an eight-day conflict with Israel.

Hamas emerged from the conflagration with a renewed sense of confidence, but its fortunes have gone sharply into reverse since the toppling of its main ally, Egyptian President Mohamed Mursi, by the military in July.

Since his removal, the Egyptian army has destroyed hundreds of smuggling tunnels into Gaza, causing drastic fuel shortages for the 1.8 million Palestinians living in the cramped enclave.

Looking to show it remained in full control, several thousand well-equipped fighters from Hamas's Qassam Brigades military wing paraded through the Gaza Strip, showing off their home-grown M75 missile and multiple-rocket launchers.

"Here are the men of Qassam. Who can defeat them? Today they are in Gaza and tomorrow they will reach out for all of Palestine," said senior Hamas official Mahmoud Al-Zahar, referring to modern-day Israel.

Earlier in the day, Palestinian militants fired mortars into southern Israel, causing no damage. The Israeli air force responded by bombing what it said were two rocket launchers. There were no reports of injuries.

The Israel-Gaza front has been mostly quiet since Egypt brokered a ceasefire to end last November's fighting, in which about 170 Palestinians, including Hamas's military chief, and six Israelis were killed.

PREPARING FOR MORE WAR

Israeli Prime Minister Benjamin Netanyahu said on Thursday that over the past 12 months there had been a 98 percent decline in the amount of rocket fire out of Gaza, but warned that Israel would maintain "a strong deterrence".

"We know that Hamas and the other terrorist organisations are continuing to arm themselves in various ways," he said during a visit to Israeli soldiers in the Gaza division.

Addressing a rally in Gaza, senior Hamas military commander, Raed Saa'ed, said the group was readying for another round of fighting with neighbouring Israel. "Every day (that) passes brings us closer to the liberation of Jerusalem."

Hamas, which has controlled the Gaza Strip since a brief Palestinian civil war in 2007, has spurned Western demands to recognise Israel and renounce violence. It is considered a terrorist group by the United States and the European Union.

The Sunni Muslim group has also angered two long-standing supporters, Shi'ite Muslim Iran and Syria, by criticising the Syrian army crackdown on Sunni rebels in Syria's civil war. This has prompted Iran to turn off the financial taps, dealing a severe blow to Hamas coffers.

Seeking to assure that Hamas was not weakened by developments around them, Saa'ed said: "We have usually grown stronger in crisis."

Underscoring the woes besetting Gaza, which remains under a rigid Israeli blockade, one of the territory's largest waste water treatment plants ran out of fuel on Thursday, sending raw sewage seeping into the city streets. (Editing by Crispian Balmer/Mark Heinrich)

Our Standards: The Thomson Reuters Trust Principles.