RAFAH, Gaza Strip, Sept 28 (Reuters/Nidal al-Mughrabi) - Business has become so bad for Gaza's smuggler barons since Israel relaxed its blockade that tunnel traders have given up spiriting goods into the enclave, and some have even turned underground exporters.

Smugglers had made fortunes hauling all manner of goods from Egypt through tunnels into Gaza, supplying 1.5 million Palestinians badly hurt by Israel's clampdown imposed in 2007 after the Islamist Hamas group took over the tiny territory.

But in June Israel eased the blockade, originally intended to weaken Hamas and prevent its Islamist backers supplying weapons to Gaza, in response to international pressure.

Over-priced clandestine imports from Egypt lost their allure as cheaper goods brought in through Israeli border crossings became available. Many smugglers went out of business and most of the roughly 2,500 tunnels have been closed or mothballed.

But a few entrepreneurs have adapted and reversed the flow, exporting through the remaining tunnels from an enclave once starved of basic goods to Egypt, Gaza's only market.

This business is very profitable, since there's no exporting at all through Israeli crossings, said Abu Khail, a Gaza Strip tunneller. He reckons 15 to 20 tunnels are now shipping to Egypt, each employing at least 12 workers.

We're exporting raw materials like aluminium, copper, scrap metal, plus eggs, ducks and chickens, said one masked worker who was packing bags for the short trip underground from Rafah to Egypt, which prohibits overt commercial trade with Gaza.

While Israel's blockade failed to break Hamas's lock on Gaza, easing it has led to a collapse of unofficial tax revenues which the Islamist group earned from the tunnel trade.

FLOTILLA

For Gaza Palestinians, the smugglers' reversal of fortune is welcome. For three years they paid exorbitant prices for everything Israel forbade, which used to be a very long list and is now much reduced, allowing for an influx of legal imports.

The Israelis relaxed their grip after taking a hammering in the court of world public opinion when their commandos killed nine pro-Palestinian activists in a melee aboard a Turkish ship trying to bust the Gaza blockade on May 31.

A United Nations report in August said the volume of supplies to Gaza now averaged 1,006 truckloads a week, up 80 percent since June.

But the UN said these positive developments were not enough to make up for the fact that imports remained far below the weekly average before the closure was instituted in 2007.

Moreover, Gaza still cannot export openly, and until enough steel and cement is allowed in it cannot rebuild the factories that once made exportable items, the UN said.

Most plant was smashed in Israel's offensive of late 2008 and early 2009, launched to stop Islamist firing into Israel.

Manufacturing jobs remain scarce and the tunnel business is as dangerous as ever for those still labouring underground.

Workers must abandon the area whenever Gaza Islamist militants shoot rockets into Israel, knowing that the tunnels are a favourite target of retaliation by Israeli warplanes.

Earlier this month one worker died and two others were wounded when an Israeli plane fired a missile into a tunnel.

The UN says Gaza needs a legitimate export trade. Unemployment is rampant in Gaza, it depends more heavily than ever on aid, and long-term economic sustainability is impossible in current circumstances.