Fayez Annan turns the silver key to start the power, pushes the green button on the standard industrial jog-run-stop switch on the dashboard, and eases the white Peugeot 205 into the main east-west shopping street in Gaza City.

With traffic abnormally sparse, thanks to the acute fuel shortages caused by the Israeli blockade, he soon reaches the distinctly un-urban and pedestrian-scattering speed of 37 miles per hour (60kph).

But then Mr Annan is proudly trying to make a point that, while it might be electric, this Peugeot is no milkfloat. "It can do 100kph (62mph)," he says with a grin, as our knuckles whiten in the passenger seats. Whether or not Mr Annan's friend Hesham Abu Sido, an electrical consultant, is justified in describing the electric vehicle as a "genius idea" which is "the most fantastic thing that has happened in Gaza", it is certainly a case of turning adversity into opportunity.

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It also proves that Gaza's famous entrepreneurial spirit has not yet been snuffed out by the draconian economic blockade imposed by Israel after the Palestinian militant group Hamas seized full control of the Strip by force a year ago tomorrow.

Since then, Gaza has seen continuing conflict, ever-deepening poverty, shortages, unemployment and despair. Against that background, the white Peugeot has become a symbol of Gaza's suppressed potential. "People who have seen it are even happier than we are," says Mr Annan. "They see it as something to be proud of in Gaza, which they haven't had in a long time."

Six months in the conception and making, this prototype conversion of the French saloon into Gaza's first electric car – powered by an AC induction motor and 38 12-volt batteries under the bonnet and in the boot – is an engineering triumph in a city starved of almost every commodity, including spare parts.

It is not just a dramatic improvement on the smelly, heavily polluting and motor-corroding substitution of cooking oil for diesel that increasing numbers of desperate drivers are opting for here. For as Gaza plunges back in time and into what economists call de-development, with many people swapping their cars for donkey carts because of fuel shortages, it could just be that its best electrical minds have seen the future – and it works.

The electric Peugeot is the brainchild of Mr Annan, 42, whose family owns a white goods business, and his friend Wasseem Al Khazendar, 48, who runs the largest company in Gaza selling electrical motors and switchgear to industry.

"I had been wanting to do something like this for a long time," said Mr Khazendar. "I wanted to make a car which was environment-friendly. Even if you aren't adding cooking oil, diesel is bad for the environment and an electric car is much cheaper to run."

As indeed it is. With desperately scarce petrol costing about £1 per litre – and more than three times that on the black market – a six or seven-hour charge provides enough power to cover 110 miles at a cost of just over 90p. And all you need to charge the batteries is a simple mains plug. "It is like charging your mobile," says Mr Annan. "You can do it anywhere – even while you are shopping."

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But, explains Mr Khazendar, it was the current situation that spurred him to action. The blockade paradoxically provided a double incentive. Growing fuel shortages sharpened interest in alternative forms of transport and, with the shutdown of industry and therefore no demand for Mr Khazendar's products, there was, he bluntly explains "no work".

Both he and Mr Annan, who had been Gaza head of Palestine TV, the pro-PLO broadcaster shut down by Hamas after it seized power, had time on their hands. Essentially, he says, "the idea is very simple – to take out the mechanical motor and put in an electrical motor". As he explains, the car uses the same brakes, gearbox and clutch but the difficult part came when, after three months, the two men chose to ditch the DC motor for a cheaper, less bulky and easier to maintain AC one, even though it meant powering it by a DC battery.

It took them just three months to crack the technical problems. You might think Mr Khazendar had more pressing – and local – worries than the future of the planet. But he closely followed the saga of General Motors' EV1 electric car programme, which was cancelled in 2003 and which he believes was the victim of pressure from the major oil companies. He is conscious that, having surged above $130 a barrel, the high price of oil could still help to make his proposition a commercial one, if and when fuel flows normally into Gaza again. "After 100 years we will have no petrol," he adds. "We should start now to try and deal with that, not wait until it happens."

The electric car is ideal for the Gaza Strip, a flat coastal territory which is about 45 kilometres long and eight kilometres wide. Not surprisingly, there has been brisk demand from Gazans – about 400 so far – seeking similar conversions at an average estimated cost of $2,500, depending on the size of vehicle. The men behind the innovation argue that the initial outlay is swiftly recoverable because of the lower running costs. The two friends are confident they can make similar conversions of lorries and buses. They say that an Italian non-governmental organisation which provides school transport in Gaza has already registered interest in having its buses electrified.

For now, however, most of their would-be customers will have to wait. To turn the conversions into a business proposition, they will first have to apply to the Hamas-controlled transport ministry for a licence, which they hope will not be too difficult. But then they need new electrical motors – instead of the used industrial one they have put into their prototype – and higher powered, lighter batteries which place less strain on a car's axles. But that will be impossible as long the economic blockade lasts. For Mr Annan, this demonstrates how people in Gaza "have the brains and capability but don't have the materials".

Over coffee in Mr Khazendar's store, the men only talk politics when prompted. As a prominent Gaza businessman who often travelled in Israel before the intifada, Mr Khazendar is the gloomiest. "I know the Israelis," he says. "I have been visiting Tel Aviv for a long time. I don't believe they want a strong Palestinian government. Whether it is Fatah or Hamas, they want a weak one."

But while Mr Annan is also highly critical of Israel, he does not acquit Hamas, whose regime (and frequent rocket attacks from Gaza ) Israel has blamed for the closure of Gaza's borders. "Hamas has given Israel the excuse to pressure us," he says. "When Hamas won the elections, they should have stayed in control of the Palestinian Legislative Council [parliament] but not gone into government. We need normal people in government who will look after the needs of the people."

But all three men, including Hesham Abu Sido, who largely shares Mr Annan's analysis, and certainly his desire for peace with Israel, want to see Hamas and Fatah working together rather than against each other. "Hamas and Fatah have to come together," says Mr Annan. We are paying the price [for the split]."

For Eyad Sarraj, the Gaza psychiatrist prominent in the campaign against the economic siege, and a fierce opponent of all forms of violence from both sides, the electric Peugeot is no surprise. "There is a lot of talent here, " he says, "so much desire and yearning to build in this place. Look what happened between 1994 and 2000 when there was so much development. Give people the right [political] environment and you will have the right people."

Explaining the motives behind his project, Mr Khazendar says: "The pressure and hard times make you think all the time about how to exit out of this problem, politically and economically." Does he see the electric Peugeot not only as a way of rising to the challenge of a year-long blockade but also as a kind of resistance? "Let's not call it that," he replies. "Let's calling it 'finding solutions'."

12 months of Hamas rule

By Donald Macintyre

Hamas took full control of Gaza, by force, exactly a year ago tomorrow. It was previously elected – in polling pronounced clean and fair by international monitors – in January 2006 but a short-lived coalition with Fatah dissolved in bloody fighting which ended in Hamas's victory on 14 June.

President Mahmoud Abbas immediately sacked Hamas's Ismail Haniyeh (below) as Prime Minister and Israel closed the crossings to all except basic humanitarian supplies. In September Israel's cabinet declared Gaza a "hostile entity".

In the year since the Hamas takeover, 564 Palestinians have been killed by Israeli forces in Gaza according to Btselem, an Israeli human rights agency, including 209 who "were not taking part in hostilities" at the time. Ninety-two deaths were of children. The Israeli military says more than 4,200 rockets and mortars were fired from Gaza. Seven Israeli civilians and seven soldiers have been killed by militants in Gaza, all in 2008.

Most of Gaza's 3,900 factories have shut down for lack of materials. Officials estimate about 100,000 people have lost their jobs since June. Power cuts are common, and fuel prices have soared due to acute shortages. On Gaza's black market, a litre of diesel increased fivefold over the past year to 25 shekels (£3.90). A refrigerator has doubled in price and a bottle of cooking gas costs up to 100 shekels compared to 43 before the blockade – partly because many people now run cars on it. Food is still widely available – though some prices have sharply increased. Most construction projects, including some funded by the UN, have stopped due to materials shortages. Shortages of power and fuel have resulted in 75 million cubic litres of untreated waste being dumped into the Mediterranean every day.

Hamas's pre-takeover armed force of 3,000 has swollen to 13,000, split between five branches. The Hamas armed wing, Izz el-Deen al-Qassam, claims it numbers over 25,000. Internal security in Gaza has increased, and the streets appear much safer than during factional fighting. But rights groups say Hamas security forces have made political arrests and use torture in jails, also saying Fatah security forces in the West Bank have taken similar action against Hamas adherents.