* As blockade loosens, Hamas sees worst times behind it
* Islamists' rule seen lasting for foreseeable future
* Wants reconciliation, prisoner swap, but not at any price
GAZA, July 8 (Reuters) - The worst could be over for Hamas whose rule in Gaza has survived three years of economic blockade and a full-scale Israeli military onslaught.
The Islamist group is starting to see cracks in Israeli and Western policies that have made governing Gaza no easy task.
Hamas still faces Israeli hostility and international sanctions, and is hated by its Palestinian opponents, foremost among them the Fatah movement which controls the Palestinian Authority in the West Bank. For Hamas, the feeling is mutual.
But to Hamas and its critics in Gaza, it seems the group has weathered the worst of the storm unleashed by its rise to government over the last four years, first through the ballot box and then by force of arms.
Israel's decision to ease its Gaza embargo is expected to offer at least some economic respite, to the benefit of Hamas. The group's rule has been accompanied by soaring unemployment and poverty caused by the blockade.
Though not the complete lifting of the embargo sought by Palestinians, Hamas believes the decision is the first step in that direction. The group has declared the Israeli decision a victory and a result of its uncompromising approach.
"Hamas has proved that it cannot be uprooted and its will is iron," said Ayman Taha, a Hamas official in Gaza. "If any state had been subjected to what Hamas has been subjected to, it would definitely have collapsed."
Emboldened by recent moral support from states such as NATO member Turkey, Hamas's confidence appears only to be growing.
It shows no sign of budging on the principles that have caused its international isolation. It will not recognise Israel, renounce violence or sign peace agreements concluded by the Palestinian rivals it defeated in elections in 2006 before seizing control of Gaza from them 18 months later.
It is also unlikely to give ground on its terms for a prisoner swap with Israel or in any talks to reunify the West Bank and the Gaza Strip under a single Palestinian government.
"We are working to achieve all of that, but not at any price," Taha told Reuters. "Hamas is not weak and does not approach any matter from a position of weakness."
"ENTITY IN THE MAKING"
Under Hamas rule, Gaza has emerged as an Islamist-run statelet on the sea, divided from the West Bank by both geography, government and ideology. Its police control the streets and its bureaucrats run the ministries.
Paying its civil service of 30,000 is one of the challenges faced by a group blocked from using the banking system because of its designation by the West as a terrorist group.
But cash-flow crises from time to time will not remove Hamas from government, say observers in Gaza. Neither will the limited threat posed by groups of more radical Islamists that have emerged in Gaza in recent years.
"The situation will stay as it is until further notice," said Adnan Abu Amer, an expert on Islamist movements. Talal Okal, a political commentator, added: "The situation in Gaza is completely controlled by Hamas."
More and more states that have boycotted Hamas are waking up to the fact that it is not going to disappear, said Taha, though acceptance is the exception rather than the norm for a group whose principle backers include Syria and Iran.
"There are contacts. There are some states which refuse to declare meetings with us," he said.
While the United States still boycotts the group, some world powers are happy to meet Hamas in public. Hamas leaders have been welcomed in Russia, part of the international "Quartet" that has demanded the group moderate its policy towards Israel.
Hamas insists it has not moderated its strategy towards Israel, even as it observes a de facto ceasefire to give Gaza's 1.5 million people a chance to recover from the three-week offensive waged by Israel 18 months ago. The group says it could accept a Palestinian state on land occupied by Israel in 1967 -- the goal long pursued through negotiations by the Palestinian Authority led by Mahmoud Abbas.
But it will only agree to a "long-term truce", refusing to give up what it believes is the Palestinians' right to the land where Israel was established in 1948.
Founded just two decades ago, the Islamists are in no mood to repeat what they see as the historic blunder committed by the Palestine Liberation Organisation when it recognised Israel at the outset of the Middle East peace process in the 1990s.
The "two-state solution" envisaged by the peace process seems an ever more distant prospect to many Palestinians. That view is reinforced by the ever deepening administrative and ideological divide between the West Bank and Gaza that makes reunification an ever tougher prospect.
"Hamas has shaped itself into a complete authority in Gaza," said Kayed Al Ghoul, the Gaza representative of the Popular Front for the Liberation of Palestine. "It has passed through the most difficult phase and every day cements its power."
Okal added: "Gaza is an entity in the making ... This project is going in one direction, separate to the West Bank." (Additional reporting by Saleh Salam; Editing by Samia Nakhoul)
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