Israelis to Quit Gaza Industrial Zone

Olmert said his decision to relocate the Erez zone's Israeli companies to Israel did not contradict these efforts. He said that Israel would not demolish the buildings and infrastructure, but leave them to Palestinians.

"There was supposed to have been continuity after the withdrawal," said Zarifa, the Palestinian Authority adviser. "A special mechanism was going to be established to maintain the rights of workers and the rights of businesses for the benefit of all parties."

Oded Tyrah, president of the national Manufacturers Association, said businesses in the zone had lost a total of $8.8 million and that dozens were failing.

Tyrah, who had lobbied to keep the zone open, said he had become disillusioned by events of recent years. "I was naive to believe that we could follow the model of the European Union: first a common market, first businesspeople join forces, then countries join forces," he said.

"It's hard to believe that two countries -- one relatively rich and the other poor, the Palestinians on the other side of the wall -- can live in peace with such gaps in the standard of living," Tyrah said.

But Yosef Alpher, an Israeli strategic analyst, said the government's decision appeared to be motivated by something other than despair. "At a certain level, it is punitive," Alpher said. "Enough of us have been murdered by extremists in Gaza that we're locking the gate and throwing away the key."

He added, "There is an attempt to release Israel of responsibility for the Palestinian population, which is nonsense, because as long as you control all the entries and exit points -- the land and air and sea -- even if there's no Israeli inside, you bear a certain responsibility for the welfare of people in there."

"We are joined together, we can't abandon each other," said a Palestinian tailor in the industrial zone who gave his name as Abu Mohammed. "They need us to do these jobs, and we need them for money."

Special correspondent Islam Abdelkarim in Erez contributed to this report.