The international attempt to force the new Palestinian government to renounce violence and recognise Israel is having a profound impact on daily life in the territories.
Most people in Gaza are from refugee families.
Aid agencies have become very concerned about the situation
They are haunted by memories of homes and fields and orchards lost to Israel in the war of 1948.
And here - in this crowded, sliver of land - they have been through the fire of two Palestinian uprisings.
It was only last summer that Israeli troops withdrew from Gaza after nearly 40 years of occupation.
People here have never had it easy. But rarely has life been quite as hard as it is right now.
The new, Hamas-controlled government is utterly broke.
It has not been able to pay its great army of civil servants for two-and-a-half months.
They support a quarter of the population and their troubles are spreading right across the economy.
People who have not been paid for two-and-a-half-months do not buy clothes, or shoes, or televisions or countless other things.
Many small businesses are in trouble.
Down on Palestine Street, there is a little shop called Paris selling perfumes and fabrics.
At the back, listening to the radio and leafing through a newspaper - without a customer in sight - Eyad Rian told me how bad things were.
He said he was not taking enough to pay for his food and cigarettes - never mind the rent.
Nobody has it harder than the government employees
Eyad's wife is pregnant with their second child, and as he spoke the air around him was heavy with the scent of unsold perfume.
But nobody has it harder than the government employees.
You hear stories now of officials who cannot make it to work because they simply cannot afford to get there.
Many are supporting their families on loans from relatives or neighbours.
A nurse called Talaal Hassoona, who is trying to raise seven children in a refugee camp, told me he even has to get basics like tea and sugar on credit now.
At work the service he can offer his patients is deteriorating - partly because the hospital is out of money.
Services such as kidney dialysis have had to be reduced
Doctors there believe four people have died because their kidney dialysis treatment had to be reduced from three times a week to twice.
In its confrontation with Hamas the West's chosen weapon has been economic isolation.
But it has proven to be a very blunt instrument that is running much of this already battered society into the ground.
And the Europeans have now grasped this.
They plan to set up a scheme that would channel funds back into the Palestinian territories.
But nobody knows yet how extensive the renewed assistance will be or who exactly will be paid, or when the cash will arrive.
And when the money does come it will bypass the Hamas government.
The West intends to keep the regime in the diplomatic wilderness.
The Americans and the Europeans plan to force Hamas to accept that there is no place among the community of nations for a government that advocates the eventual destruction of Israel.
Hamas itself has largely observed a ceasefire for over a year
And there are many Palestinians too who say Hamas must adopt a more realistic approach towards the Israelis.
But across the board people here are shocked by what they see as the harshness of the tactics of the West.
They are appalled that it has sided so firmly with Israel, rather than the victims of the Israeli occupation.
In a shop on Wahde Street, a small roundish man called Osama Waleed sells roasted cashew nuts.
His English is not great, but when we talked politics he spoke for many Gazans when he kept repeating one line: "Give Hamas a chance".
No doubt many Europeans would tell Mr Waleed that violent Islamist groups like Hamas need to be confronted - not appeased - and that a stand against these forces has to be made in Gaza.
Hamas... has played the democratic game that the West advocates
And it is true that Hamas does nothing to stop organisations like Islamic Jihad sending suicide bombers into the streets of Israel.
But Hamas itself has largely observed a ceasefire for over a year. It has played the democratic game that the West advocates.
It won January's election fairly.
And Hamas is an Islamist militant group that is ready to engage - at least on its terms - with Europe and America.
But if it is turned away, there has to be a danger that other Islamists in the Middle East and elsewhere may conclude that - for them too - the path of dialogue and democracy will take them nowhere.
From Our Own Correspondent was broadcast on Thursday, 18 May, 2006 at 1100 BST on BBC Radio 4. Please check the programme schedules for World Service transmission times.