TWENTY-FIVE feet underground, Ahmed is digging in the sands of Gaza. Crawling on his belly in the narrow neck of a man-sized tunnel, he pulls a heavy plastic sack towards him and attaches a rope around its neck. There is barely enough room for the bag to pass and as Ahmed's head touches the walls of this cramped tomb, a few grains of earth dangerously trickle from the smooth roof.

Unconcerned, Ahmed jerks down hard on the rope and a distant diesel-powered winch engine kicks in. The bag slithers its way into the darkness. It is heavy, awkward but precious. Inside the bag are four new Kalashnikov rifles, still factory-sealed. The underground journey is short, just 300 yards from Egypt into Gaza, but at the end each bag, and the deadly weapons that it contains, is now worth another Euro760. And on a good night the same clandestine, cross-border tunnel trade will earn Ahmed and his bosses Euro76,000.

Ahmed is a smuggler in the world's most dangerous stretch of land: the Gaza Strip. He is a digger in what has become one of the most extraordinary and lucrative tunnelling industries in the world - a secret flow of weapons beneath the sand that threatens to engulf the area in civil war and provoke another all-out Middle East conflict.

Just 20 miles away in Gaza City, the two main Palestinian factions, Fatah and Hamas, are at each other's throats over who should be in power. The first gun battles on the streets have already started and a Palestinian civil war, another bloodbath, is beginning. Ahmed says he has been working flat out for the past few months to supply each side's weaponry.

For the secret moles of Gaza, business has never been so good.

Bounded by Israel on two sides, by the Mediterranean to the west and by Egypt to the south, Gaza is not a country, just an enclave that has become the world's largest open-air prison. The Strip, crammed with more than a million Palestinian refugees, is only 30 miles long and five miles wide. It is one of the most densely populated places on earth.

Gaza is also famous for being the birthplace of the Palestinian suicide bomber. Israel seized control of the Gaza Strip in 1967 but finally withdrew in 2005 after decades of futile military occupation. To prevent suicide bomb attacks Israel has sealed the Strip behind a 30ft-high concrete wall and an elaborate array of electric fences, barbed wire and killing zones.

But even today, above ground, all movement to and from the Strip is rigorously controlled and monitored by Israeli army metal detectors, x-rays, whole body scanners and identity checks. Even the border crossing between Gaza and Egypt is overseen by Israeli officials who have the right to refuse entry to anything, from a truck to a suitcase, or to anyone who arouses their suspicion. The current Hamas Palestinian prime minister, Ismail Haniyeh, was turned back at the border in December after the Israelis refused to allow him to cross into Gaza with Euro27m in cash in his suitcases - money intended to help run the now crippled Palestinian Authority.

Theoretically, the only way in and out of Gaza is through an Israeli-controlled crossing point.

Except, of course, for Ahmed and his fellow army of diggers, who have built a labyrinth of secret tunnels beneath the parched sands of the southern Gaza town of Rafah, which straddles the border with Egypt. And who, for a price, are prepared to supply or smuggle anything - from cash, guns or rocket-propelled grenades to heroin, hashish, people or even just cigarettes.

"There is a price list, a tax, for everything, " says Ahmed. "It's $1,000 [Euro775] for a person, $250 [Euro194] for a Kalashnikov, $2 [Euro1.55] a bullet and a dollar [77c] for a pack of cigarettes, " says the 23year-old, who has been digging tunnels since he was 16.

Eventually the bag of Kalashnikovs pulled by the winch cable emerges on the Palestinian side.

Hamid, another tunnel worker, unclips the bag and it is lifted out of the shaft and deposited in the corner next to a family sink.

From the outside the house that hides the tunnel is just another drab, hastily-built, bleached, concrete three-storey Palestinian apartment block in a sea of identical buildings. The tunnel entrance is hidden under the shower-room floor.

"We design the false floor and the tiles so that they snap back into place. We hide the equipment in the shaft, put the floor down and re-connect the drain. In five minutes you could be having a shower in here, " says Hamid.

Each tunnel's location is top secret, known only to members of the smuggling team, but it is estimated there are at least 100 subterranean passageways zig-zagging their way under the 10 miles of the Gazan-Egyptian border.

The boom-town rats Rafah was once a sleepy, obscure backwater.

But today it's the first stop on the road to an allout regional conflict. Some members of Israeli intelligence harbour suspicions that Hamas is being secretly armed by Iran, and that all of that weaponry flows through the tunnels of Rafah.

The latest Israeli-Arab wars exploded this summer when a Hamas tunnelling team dug an 800-yard tunnel into an Israeli army border base near Rafah and kidnapped Gilad Shalit, an Israeli army corporal. The audacity and sophistication of the operation - the tunnel took a year to dig - shocked and worried Israeli military chiefs. Shalit is still missing.

Since the Israeli army withdrew from Gaza, the number of tunnels has mushroomed. The head of the Israeli intelligence service, Shin BetYuval Diskin, says that in just 12 months 33 tons of military-grade high explosives, 20,000 assault rifles, 3,000 pistols, six million rounds of small arms ammunition, 38 long-range Qassam missiles, 12 shoulder-fired, anti-aircraft guided missiles, 95 anti-tank rocket launchers, 410 anti-tank rockets and 20 precision-guided antitank missiles have been smuggled into Gaza through the tunnels.

Some Israeli military analysts believe Hamas is trying to imitate their Lebanese counterparts, Hezbollah, and stockpile thousands of longerrange rockets for an offensive against Israel.

"Hamas and Fatah have their own tunnels for bigger stuff such as rockets. They have their own engineers, " says Ahmed, whose identity, like the other tunnellers, has to be disguised. "A lot of material is shipped through. The £18m [Euro27m] in cash that Haniyeh had at the border was a cover story so he could point to where he got the money. If Hamas had £18m on the surface you can be sure they were shipping £35m [Euro53m] underground."

Smuggling is not a new form of human activity. Wherever there is a border there will be someone seeking to smuggle something past guards. But the origins of the smuggling tunnels in Rafah can be traced back to 1982 when Israel withdrew from the neighbouring Sinai peninsula as part of a peace accord with Egypt's then president, Anwar Sadat.

Israel drew a new border that ran right through the middle of Rafah, an historic settlement which dates back to the time of the pharaohs. An undistinguished sprawl of refugee camps, dusty breeze-block houses and corrugated-iron dwellings, the town became the frontline between the Jewish state and a hostile Arab world.

The Israeli army immediately fortified the frontier with gun towers, electric fences and concrete barriers and, just as with the former Berlin Wall, the border divided families and neighbourhoods. Rafah was cut in two as this new dividing line sliced its way through farms, shops and schools.

For years at a time the border was sealed.

Palestinians, stateless and devoid of passports, were trapped. The 30ft-high rusting steel plates embedded into the sands of Rafah did not just mark the frontier; they were also the boundary wall of the Palestinians' open prison.

Prominent Rafah clans, such as the Al Sha'ir, Breaka and Zorob families, who often numbered thousands of distantly related cousins, found themselves on opposite sides of a hostile international frontier. But these blood and business ties quickly proved themselves deeper than the foundations of Israel's border posts. Despite the steel wall between them, at their closest point, some houses of the old Rafah remained less than 100 yards apart. The digging began.

Like many things in the Middle East, the incentive for the tunnels was a combination of politics and profit.

Palestinian militants in Gaza wanted guns to fight the Israeli army, and war is good business.

In the back streets of the Egyptian capital Cairo, the price of a Kalashnikov is Euro240. But the same weapon might sell for 10 times that in Gaza. Bullets, bought for a few cent, can sell for Euro2 each in Rafah. Even cigarettes, 60c a packet on the Egyptian side, sell for Euro3 in Gaza. Smuggling is the only growth industry in a town that has become a war zone.

"I've known some of these people [smugglers] for 20 years or more, " says a former policeman in the Palestinian Preventive Security Organisation, whose job is to block the tunnels. "In the '80s, they were the ones who would come up to you in the street and ask for a cigarette. That's how poor they were. Today they drive Mercedes, have three wives, and live in big houses. I know they did not make that sort of money selling melons off a handcart in Rafah's vegetable market."

To halt the arms-smuggling tunnels, the Israeli army sent in armoured bulldozers to demolish thousands of Palestinian homes and widen the border security zone - called the Philadelphia Road. Rafah was soon a battlefield, a dangerous place. In the past two decades, hundreds of Palestinians and scores of Israeli troops have been killed in gunfights and ambushes.

Between 2000 and 2005, Israeli army search teams located and blew up more than 90 tunnels and destroyed the houses that hid their entrances. But the demolitions didn't deter the tunnellers, who just dug longer and deeper.

Digging a tunnel can cost Euro75,000 and usually starts in the front sitting room of a compliant houseowner on the Palestinian side of the border. After lifting a rug, tiles or a bathroom floor, the diggers excavate a 5ft-wide shaft, and go down until they reach the underlying clay, between three and 15 yards deep.

Once they hit this, the tunnellers start digging their way south towards Egypt with shovels, pickaxes or small jack-hammers. Depending on the soil, the tunnel's sides might have to be shored up with wood. "The tunnel owners don't like it because the wood makes it more expensive and slower. But sometimes we have to do it, " says Hamid.

Digging is dangerous, claustrophobic work. In October, two tunnellers on the Egyptian side died when the tunnel they were working on collapsed. But Hamid shrugs off the dangers. "I'm more worried about the Egyptians' poison gas.

Sometimes they find a tunnel and fire gas inside.

Months later, when you re-open the tunnel, the gas is still there. And it will kill you. It happened to my cousin Mahmud."

For Ahmed and Hamid, tunnel collapses, poison gas and Israeli bullets are occupational hazards.

Both men are married and have children. In Gaza's collapsing economy, jobs are hard to find and in relative terms the tunnellers earn a fortune. Under a complex but fixed financial formula, each tunneller, plus the householder, is awarded a 'share' in the tunnel's profit. One night's lucrative trade in arms can deliver a bonus pot of almost Euro20,000 to be divided up among the workers. On average the men make Euro2,280 a month in a society where the average wage is Euro455 a year.

As the tunnel progresses, cables for lights are run in and electric vacuum pumps refresh the stale humid air - which smells of sweat and fumes from the diesel engines. More sophisticated tunnels also run telephone lines underground for the dispatcher on the Egyptian side to communicate with his counterpart at the Palestinian end. As they dig, the tunnellers haul the sand and clay out in square plastic water containers with smooth undersides that glide over the tunnel floor.

During the excavation, the bulky tunnel waste is carefully piled up inside the house until it can be removed safely under cover of darkness. If Israeli military search teams locate a tunnel entrance they will call in an artillery strike to destroy the house. In October, in an operation called 'Squeezed Fruit', Israeli tanks and combat troops re-entered Gaza and destroyed 15 tunnels. But what began as a below-the-kitchensink family business is now a multimillionpound construction industry.

"The tunnels are similar to the London stockmarket. Shares rise and fall. If there is a security crackdown on the Egyptian side, the Jews attack and blow up some tunnels, or Hamas wants more bullets, then the price of a rifle will rise by £100 [Euro77]. If times are peaceful then the price falls. But the tunnels and the smuggling never stops, " says the former Palestinian police officer.

Ownership of the tunnels, with the exception of the military ones controlled by Fatah or Hamas, is dominated by a handful of prominent clans in Rafah. Using their cross-border family connections, these clans can simultaneously organise tunnelling squads on the Gaza and Egypt sides of the tunnel. Keeping the smuggling in the extended family also keeps spies out of the organisation.

Bribes and secrecy The smuggling network extends far beyond the tunnel itself. Guns must be bought, explosives procured and driven across the vast empty deserts of the Sinai peninsula that lie to the south of Rafah.

In October 2006, 1,100lb of high-grade military explosive was found hidden in mountains 80 miles from Rafah. The explosive was bound for the tunnels and had probably been smuggled into Sinai via a Red Sea port. For the Gaza smugglers, the loss of half a tonne of explosives - bigger than the IRA's City of London bombs - was just a minor setback.

The entrance to the tunnels in Egypt - the eye of the tunnel - is always bigger than the Gaza entrance and is often sloped for easier access.

But, as in Gaza, it is hidden in a house or workshop.

In theory, Egypt and Israel are at peace.

Egypt's police force is headed by one of the world's most brutal and feared intelligence agencies, the Mukhabarat, notoriously used by the CIA to torture Islamic terrorists. It should be easy to close down the tunnels on the Egyptian side, but there is little political will in the Egyptian capital of Cairo to be seen to be Israel's policeman on the border.

And in Rafah, local border guards are easily bribed to look the other way. "It's another part of the deal, " says Ahmed. "The tunnel boss pays the policeman or army officer $2,000 [Euro1,550] to be elsewhere on the night the weapons go through. Since a conscript in the Egyptian army is paid only £8 [Euro12] a month, even $1,000 [Euro775] is a fortune to him. Everyone gets a cut." When guns are in short supply, Ahmed and his boss will ship cigarettes or hashish and heroin, but the real money is in guns.

On the night of a major shipment, the smuggling consignment is run like a military operation. Before the arms or drugs arrive at the Egyptian side, Ahmed and Hamid secure the Palestinian end of the tunnel. Spotters are hidden to watch for suspicious activity.

Once the coast is clear, Ahmed and Hamid descend into the tunnel and get the winches ready and crawl through to the Egyptian side.

The tunnel boss will then give the go-ahead for the operation to begin. The arms will arrive at the "eye of the tunnel" - sometimes nicknamed in Arabic "the mouth of the fish" - and be fed in as quickly as possible. The smuggling squads are always heavily armed, prepared for trouble.

On the Palestinian side the guns are quickly off-loaded and taken to a secret location for the "count". Each shareholder, the workers and the householder and his sons, is represented to check what's there. If it's weapons, they are unpacked and inspected.

Arms smuggling is not backed up by a noquibble legal guarantee. The final tally, sums owing and sums paid, is always calculated in dollars. Sometimes the money is shipped down the tunnel to Egypt that same night, but generally the more sophisticated operations use Western Union - the preferred money transfer method of all international criminal gangs.

Once the run is made the tunnel is shut down as quickly as possible until it is needed again. Ahmed and Hamid replace the tiles and the floors and reconnect the drains. And then slip out into the dark streets of Rafah and go home far wealthier men.

Above ground the unlit streets of Rafah are eerily quiet. Nothing moves. But below ground somewhere the moles of Gaza are frantically burrowing.