* Fighting Sinai insurgency, Cairo sees smuggling as threat
* Hundreds of tunnels avoid detection throughout Gaza war
* Egypt-Gaza tunnel entrances hidden in abandoned houses
* Profitable business for tunnel operators despite risk
* Israel targeted Hamas infiltration tunnels during war
AL-SARSOURIYA, Egypt, Aug 21 (Reuters) - A third of the houses on the main street of this Bedouin town near Egypt's border with Gaza look derelict, but inside they buzz with the activity of tunnel smugglers scrambling to survive a security crackdown by the Egyptian army.
Smugglers and tunnel owners, who once publicly advertised their services, have taken over the nearly two dozen single-storey concrete structures and boarded up their doors and windows to avoid the attention of the authorities.
While tunnels used by Gaza's dominant Hamas militants to infiltrate Israel were a priority target of an Israeli offensive in the Palestinian enclave this summer, many smuggling conduits into Egypt have skirted detection.
That has allowed transports of weapons, building materials, medicine and food to continue to and from the small, coastal territory that is subject to blockade by both Israel and Egypt, tunnel operators say and Egyptian security sources acknowledge.
"During the Gaza war, business has flourished," said a Bedouin guide who gave Reuters access to one of the tunnels and a rare look at how the illicit, lucrative industry has evolved since Egypt began trying to root out the passages in 2012.
Egypt sees a halt to the flow of weapons and fighters as important to its security, shaken in the past year by explosions and shootings by an Islamist insurgency based mainly in the Sinai Peninsula bordering Gaza and Israel.
Humanitarian supplies and building materials headed in the other direction have provided a vital lifeline to the 1.8 million Palestinians in Gaza who have been living under the Israeli-imposed blockade since Hamas seized the enclave in 2007.
Cairo mediated talks this month between Israel and Palestinian factions led by Hamas to try to end the war in Gaza but refused to discuss easing its tight control of the Rafah border crossing as part of the deal Hamas seeks.
A 10-day ceasefire expired on Tuesday without a deal to extend it indefinitely, with Israel resuming air strikes on Gaza and Hamas and other Islamist militants their rocket salvoes into the Jewish state.
The guide who accompanied Reuters and requested anonymity estimated the total number of functional tunnels in about 10 border villages like Al-Sarsouriya at nearly 500 - down from about 1,500 before the Egyptian clampdown began.
Most of the bigger tunnels - the kind that can accommodate cars and even trucks - have been destroyed by the Egyptians, but smaller ones ranging 1-2 meters (yards) in diameter survive.
The guide said that as many as 200 new tunnels had been built in the past two years, dodging Egyptian security sweeps, with new ones coming onboard each week.
The smaller tunnels are still big enough to allow weapons, building materials and humanitarian supplies to pass under the heavily guarded land crossing.
"Each day, about 3 or 4 people cross with weapons, and each one carries about 6 or 7 guns," the Bedouin guide said, without specifying what type of arms were being transported.
A senior Egyptian security officer confirmed that while the biggest and longest tunnels were no more, smaller ones remain operational.
"The situation is much more controlled. It's not 100 percent but we are trying to reach this percentage," he told Reuters. He said the army had achieved a noticeable reduction in smuggling of weapons, fuel, food and drugs over the past two years.
Egypt accuses the Islamist Hamas of supporting the Sinai insurgents, which Hamas denies. For its part, Israel has long wanted Egypt to end arms smuggling from Sinai to Gaza militants.
LUCRATIVE TUNNEL BUSINESS BEHIND SHOWER CURTAIN
A shower curtain is all that conceals the entrance ramp to the tunnel which Reuters visited. Two sheep and a cart in an adjacent room gave the impression that the house was abandoned, should security forces come searching.
The tunnel owner and his teenage son sat on cushions around a small wooden table beside the curtain. A photograph of the pair hung on the wall overlooking their cash cow.
The concrete-lined entrance to the 600-metre (0.37 miles) tunnel turns to dirt after a few steps. Posts support a wooden ceiling as deep as 10 meters (33 feet) below the surface, and energy-saving bulbs every few meters light the way.
The Egyptian owner accompanies passengers to the midpoint where a sentry checks on the security situation on the other side and then brings them to meet the Palestinian co-owner.
"This tunnel is a partnership between us," said the Egyptian. "Building it cost us $300,000. He paid half and I paid half. The profit is split between us 50-50."
The tunnel regularly brings the men profits of $200 a day. Shipping rates vary, starting at $12 for one-metre crates of medicine or food and topping out at $150 for weapons, building supplies or fuel.
People can pass for $50 each but the rate increases if they are armed. Most of the passengers are men, the owner said, but women and children also use the tunnels. Farm animals occasionally make the journey as well.
"If someone is passing with one or two guns, we charge $60 to $70. But if someone has more weapons, it's a special operation and might cost as much as $1,000 or $2,000 depending on the type of weapon," the Egyptian owner told Reuters.
He said he does not check the identification of people who pass and even allows masked men to use his tunnel if his Palestinian partner vouches for them. "As long as they give me $50, I let them through," he said.
The owner said he also does not seek to know the affiliation or destination of militants and weapons for fear that displeased customers will use another tunnel or report him to the security forces. "I just deliver the weapons and take the money," he said. "I'm not concerned with where they're going."
In Gaza, Hamas has disputed Israel's claim that it demolished all of the militants' infiltration tunnels during the current conflict, and granted a rare tour to a Reuters news team last week to back up its assertion. (The name of the correspondent is being withheld for security reasons; Additional reporting by Yasmine Saleh in Cairo; Writing by Stephen Kalin; Editing by Mark Heinrich)
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