By Adam Entous
JERUSALEM, Jan 23 (Reuters) - Hamas has exposed Israel's inability to rein in the Gaza Strip, proving it holds the power to blow open the border and turn a crippling Israeli blockade into a public relations nightmare for the Jewish state.
Israel's stated goal last week in tightening its cordon around Gaza and cutting off fuel to its main power plant was to pressure Palestinian militants to halt rocket attacks that have sowed panic in southern Israel.
But a global outcry forced Israel to ease the ban on fuel and aid shipments to the Islamist-run territory and hours later Hamas militants blasted open the wall between Gaza and Egypt to let tens of thousands of Palestinians pour across.
The lights are back on in Gaza City for now and Hamas's leader-in-exile has vowed no let up in the rocket salvoes.
Danny Ayalon, Israel's former ambassador to the United States, said Israel had walked into a Hamas trap.
"This was a resounding failure, a public relations disaster," he said. "And we've lost deterrence for the next time."
Israel had largely avoided Western censure for its military and economic cordon since Hamas seized control of the coastal territory in June after routing rival Fatah forces loyal to Palestinian President Mahmoud Abbas.
But by cutting off fuel to the power plant, Israel went a step further than most could accept.
"Israel gave Hamas the justification it needed to take unprecedented measures," said International Crisis Group analyst Mouin Rabbani.
PR VICTORY FOR HAMAS
Israeli officials countered that the public relations fallout from the easing of the embargo and the destruction of the border wall was exaggerated and said it would not constrain the army.
Although repeated raids have failed to end rocket fire since Israel pulled Jewish settlers from the Gaza Strip in 2005, the army noted a reduction in rocket fire since the fuel cut took hold on Saturday.
Retired Brigadier-General Shalom Harari of the Institute for Counter-Terrorism in Herzliya, near Tel Aviv, said the Hamas victory in Gaza would be limited to "PR" but the situation would now put more pressure on Egypt to act -- to Israel's benefit.
"The situation may look worse on the surface but Israel has not lost control on our border," he said.
Some Israeli officials, who believe Egypt should do more to prevent weapons smuggling to Gaza, expressed quiet satisfaction as Gazans streamed into Egypt to stock up on food and fuel. Cairo has rejected accusations it failed to stop smuggling.
"For months and months, Israel has been telling the Egyptians, 'You guys have been playing with fire.' So I'm not so sure Israel is not unhappy with what's going on right now," said David Makovsky, director of the Washington Institute's Project on the Middle East Peace Process.
"The whole idea is to get Egypt to at a minimum undertake responsibility for what is going on at the border and perhaps even to take authority over Gaza itself," Makovsky added.
The crisis could, however, complicate a proposal that has some Western backing to hand control of Gaza's crossing to President Abbas's prime minister, Salam Fayyad, whose authority has been limited to the occupied West Bank.
Abbas and members of the government he appointed have stepped up public calls for the blockade to be lifted, although Western officials say some Fatah officials were initially quiet backers of keeping the crossings closed.
The closures were supposed to undermine Hamas's public standing among Gaza's 1.5 million residents, setting the stage for a Fatah comeback, the Western officials were told.
But while Hamas's popularity has declined, it has been able to press on using a network of tunnels under the border with Egypt to bring in weapons and tens of millions of dollars a month, according to Israeli and U.S. intelligence estimates.
Hamas could now use the crisis at the Egyptian border to try to pressure Cairo for an agreement giving it say over how the crossing at Rafah operates in future. Egypt has proposed talks with Israel and the Palestinian Authority on revising the border arrangement -- although not with Hamas.
Rabbani said Hamas saw the Egyptian border as their "only option for reversing the siege" and may believe "it's going to be politically impossible for Egypt to forcefully seal it". (Editing by Matthew Tostevin)