* Palestinians dismayed at Mursi's Gaza border policy
* Egyptian tunnel crackdown intensified in past two weeks
* Cairo concerned tunnels used by Sinai militants
By Nidal al-Mughrabi
GAZA, June 24 (Reuters) - Egypt has intensified a crackdown on smuggling tunnels between its volatile Sinai desert and the Gaza Strip, causing a steep hike in petrol and cement prices in the Palestinian territory.
Palestinians involved in the tunnel business say that the campaign, which began in March and has included flooding of underground passages, was ramped up in the past two weeks before a wave of opposition-led protests in Egypt expected to start on June 30.
Egyptian President Mohamed Mursi has come under political fire at home over a strong challenge to his authority by militant Islamists in the Sinai who have attacked Egyptian security forces in the peninsula.
Egypt's military, struggling to fill a security vacuum in the Sinai since autocrat Hosni Mubarak was swept from power in 2011, has pledged to shut all tunnels under the Gaza border, saying they are used by militants on both sides to smuggle activists and weapons.
The moves against the tunnels have dashed the hopes of many Palestinians that Mursi, a member of the Muslim Brotherhood from which Hamas was born, would significantly ease Egyptian border restrictions on Gaza, which is also subjected to blockade by Israel.
"Business is clinically dead," said Abu Bassam, who employs 40 workers in a Palestinian tunnel network in Rafah, a town on the border. "Tunnels are almost shut down completely."
Only 50 to 70 tunnels, out of hundreds that have provided a commercial lifeline for the Gaza Strip, are still open and in partial operation, owners said. Other tunnels are used to smuggle in weapons for militants from Hamas and other groups.
The Egyptian army has sternly warned residents in Sinai not to approach the fence with Gaza and to stop trading through tunnels or face punishment, according to Palestinian tunnel owners who learned about the order from Egyptian counterparts.
"Today we have to pay extra money to convince an Egyptian driver to bring goods to us..., resulting in rising prices of basic materials here," said Abu Ali, another tunnel owner, standing beside the shaft of his deserted tunnel.
The price of cement in Gaza has soared from 350 shekels ($95) a tonne to 800 shekels ($217). Palestinians who bought relatively cheap petrol smuggled from Egypt now have to pay for fuel imported from Israel selling for double the price.
The scene of long queues of vehicles outside petrol stations has become common in past two weeks, with taxi drivers waiting to snap up small quantities of fuel trickling in from tunnels that are still operating.
One tunnel owner, who employs 24 workers, said he was now bringing in 50 tonnes of food products a day compared with 300 tonnes two weeks ago.
Many Gaza residents complain they have been without cooking gas for weeks, with tunnel supplies low and imports from Israel scarce.
Ghazi Hamad, deputy foreign minister in the Hamas government, said it understood Mursi's complicated internal situation and would be prepared to close all tunnels if Egypt allowed goods through Rafah, its only Gaza crossing.
At Rafah, where cross-border passenger movement increased significantly soon after Mursi took office, passage has been particularly slow recently and hundreds of people have had to delay their trips.
Egyptian officials cited technical problems.
Israel maintains an overland and sea blockade of the Gaza Strip but has eased some import restrictions in the past several years in the face of international criticism.
It announced on Monday the closure of its only commercial crossing with Gaza until further notice in response to overnight cross-border rocket attacks by Palestinian militants.
(Editing by Jeffrey Heller/Mark Heinrich)
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