GAZA, July 27 (Tom Perry/Reuters) - Demand for Abu Mohammed's smuggling services has fallen in the weeks since Israel announced it would loosen its blockade of the Gaza Strip by letting more goods in.

But he doesn't seem too worried. Aged just 26, he says he is set up for life thanks to three years operating one of the tunnels that have supplied Gaza from Egypt during the embargo, acting as a lifeline for the otherwise sealed-off territory.

By God, even my father doesn't know how much money I have made, the Palestinian said. I have more than one bank account. Nothing is in my name in case one day I go to jail.

He declined to meet and would not give his real name in a telephone interview. Under international law, I am a smuggler.

On a good day, he said his tunnel would make $100,000.

Now he drives a Mercedes that cost $80,000, has set up a home with his wife and is giving his siblings the university education he was forced to abandon because his father couldn't afford the fees.

Smugglers who have dug hundreds of tunnels to Egypt are among the few Palestinians to have benefited from the blockade imposed by Israel on Gaza since its enemies in the Hamas movement rose to power.

The rise of the black marketeers has mirrored the decline of Gaza's traditional business elite. Their influence has crumbled together with their factories and firms during the embargo.


UNDERGROUND ALTERNATIVE

Long a supply route for weapons, the tunnels to Egypt provided an alternative to land crossings almost entirely closed by Israel in response to Hamas's takeover of Gaza in 2007.

Everything from cars to food has been brought underground from Egypt, whose security forces have been unwilling or unable to halt fully the lucrative if risky business.

Israeli warplanes often target the tunnels in response to rocket attacks from Gaza. Egypt has built an underground barrier to cut off the trade. Tunnel work is profitable. But ultimately I am risking my life to make money, Abu Mohammed said.

The Hamas government regulates the industry, which it sees as an exceptional response to an exceptional set of circumstances created by the blockade.

This was a good thing for us and a disaster for others, said Abu Mohammed, reflecting on the impact of an Israeli policy that has had a ruinous impact on Gaza's economy, causing unemployment and poverty levels to soar.

His tunnel mostly brings processed foods and dairy products from Egypt, he said. It can make special deliveries to order, for example, bringing Egyptian-made furniture that is cheaper than what is manufactured in Gaza. Price is according to weight, volume, quality, he said.

Demand had already started to drop before Israel announced its new policy on June 20, he said, attributing the fall to depressed demand caused by Gaza's tough economic conditions. There is no liquidity, he said.

The tunnels have been in a state of flux since Israel said it would loosen the embargo. Customers are assessing the prices, quality and quantity of goods that Israel is allowing Palestinians to import overland.

For now, Abu Mohammed believes demand will persist for goods smuggled from Egypt. The siege is still imposed, he said. The crossings are bringing in very small quantities. (Editing by Samia Nakhoul)