GAZA (Reuters) - Palestinian Islamists who run the Gaza Strip find themselves in the odd position these days of bailing out speculators who went from boom to bust when Israeli warplanes blew up their smuggling tunnels into Egypt.

A Palestinian man sits next to the entrance to a smuggling tunnel destroyed after an Israeli air strike in Rafah, near the border between Egypt and the southern Gaza Strip, October 3, 2009. REUTERS/Ahmed Zakot

Profits from hundreds of tunnels burrowed into the neighbor state to get around an Israeli embargo skyrocketed after the Islamist Hamas movement seized control of Gaza from Western-backed Palestinian President Mahmoud Abbas in 2007.

Israel tightened its blockade sharply, fearing Hamas would import arms, and profits from the smuggling operation multiplied even faster, fuelling a hot market in tunnel shares.

But when Israel launched a major offensive in late December to stop Hamas forces firing rockets at its southern towns, the tunnel network was designated a prime target and fortunes were lost, some real, some on paper.

Now, Hamas is trying to deflect criticism of its handling of the millions of dollars Palestinians sank into the business that literally collapsed under their feet.

Economy Minister Zeyad al-Zaza estimates some $60 million was lost by thousands among Gaza’s 1.5 million population, from housewives to wealthy merchants, who plowed cash through middlemen into expanding the tunnel network.

Two key middlemen are among several people arrested over the losses, Zaza added. He said $10 million recovered had gone back to investors who lost, rescuing 16.5 percent of their capital.

“We are close to returning another $20 million, which will be handed over to the government. Hopefully the people will be receiving another payment,” Zaza said.

The pain, however, remains great for investors who say they made massive profits on their original investments, only to see those evaporate along with their capital when tunnels were destroyed in Israeli air raids.

One Gaza economist estimated paper fortunes worth between a quarter and half a billion dollars may have gone up in smoke, though accurate figures are hard to come by in an economy cut off from the world and dominated by clandestine dealings.

CAUTIONARY TALES

University teacher Jad Sabri recounted how he won -- and lost -- undreamt of sums in the tunnel trade after investing a substantial chunk of savings in early 2008.

“I put $60,000 into the tunnel business. In a few months the man came to me with $500,000 saying that’s what my money had become,” Sabri told Reuters. “It was unbelievable.”

“I was so happy, I gave it back to him and asked him to invest it for me, hoping for bigger profits.”

Unfortunately, Israel pounded the warren of tunnels under the sandy border between the town of Rafah and Egypt’s Sinai peninsula in December and January, and its airforce continues to hit them every time a rocket from Gaza explodes in Israel.

The tunnels bring in everything from calves to sewing-machines and soap powder. Israel says Hamas also imports arms, including missiles.

“I lost it all,” Sabri said of his investment. “They fooled us. They knew that if they tell somebody your $10 has grown fivefold in two months they’ll insist on putting more in.”

Abu Ali, who trades in clothing in Gaza, said he lost about $200,000 but others lost even more: “Some were greedy and others just could not help themselves, looking for an easy profit.”

Gaza economist Omar Shaban estimated possible losses at $250-$500 million.

“It’s a world of mystery,” he said. “No one really knows the reality of this business. Those who took people’s money had no business background and their methods of investment were vague.

“Hundreds of millions of dollars disappeared and that can only be a disaster in the general economic conditions in Gaza.”

Economy minister Zaza, a member of the unrecognized Hamas government, rejected criticism of the Islamists’ mismanagement, saying those who lost out had taken private initiatives to invest without due precautions.

Hamas itself is widely assumed to benefit from the tunnels, hundreds of which are still operating.

Aside from financial gains, Hamas benefits by the way the tunnels blunt the impact on Gaza’s population of the Israeli blockade, which permits only the most essential goods to pass over authorized crossing points from Israel.

Health officials say more than 100 people have died digging and operating tunnels in the past year alone.

“The tunnels harm our national interests and harm our economy,” Zaza said. “But people have been forced to build them because of the blockade. Once the blockade is lifted and crossings are reopened there will be no need for tunnels.”