By Mark Heinrich
KHAN YOUNIS, Gaza Strip, July 21 (Reuters) - Construction magnate Mahmoud al-Fara has a dream -- modern apartment blocks for Palestinian refugees rising in the place of Jewish settler villas he can see beyond the barbed wire from his office window.
With Israel set to vacate settlements in the Gaza Strip, Fara's crumbling, crowded hometown of Khan Younis has mapped out expansion plans with new housing, shopping districts, prime farmland and seaside tourism.
"We can end the days of 20 relatives living in two rooms," said Fara, a U.S.-based businessman for decades but now keen to develop Gaza starting with a low-cost housing project for tens of thousands from Khan Younis's refugee camp.
"To be able at last to live in modern homes, without power cuts or open sewers, and to find work and go to the beach over there, will be great," said refugee Abu Omar, 57, gazing at the Mediterranean glinting beyond barriers posed by a settlement.
But while Israel's first removal of settlers from occupied territory Palestinians want for a state is barely a month away, investors have yet to pounce since no one knows what assets will be left behind, or whether Gaza will be accessible from abroad.
Both sides agree that Israeli troops would raze the 1,500 suburban settler houses. But they disagree over who should dispose of the rubble and where -- a row that has muddied prospects for decisions on how to dispose of other settler holdings such as 4,000 greenhouses.
Israel says it would withdraw forces from Gaza's border with Egypt, the territory's only outlet to the Arab world, by year's end if a special security force that Cairo would form proves able to stop gun-running to Palestinian militants.
But it aims to keep control over Gaza's air space and offshore waters, which could deter Arab investment. Israel is also undecided about granting Gaza an important travel and trade corridor through its territory to the West Bank.
MUTUAL MISTRUST, PALESTINIAN DISORDER
Israel cites doubts about the Palestinian Authority's ability to subdue armed factions who reject peacemaking. Gaza militants have repeatedly flouted a February ceasefire pledge, saying they would follow the de facto truce but also respond to Israeli raids.
Palestinian police confronted militants responsible for a mid-July suicide bombing and rocket salvo that killed six Israelis in all. The tension remains high despite a deal between both sides to end internal fighting.
"The internal obstacle to development in Gaza is that the Palestinian Authority is not in control of things on the ground," Fara said. "There's fear of a post-pullout power vacuum."
Palestinian leaders say Israel wants to keep Gaza as a captive market by refusing to open it up. They fear that continued isolation will deepen despair and disorder in Gaza, harming Palestinians' claim to statehood.
"Whatever assets Gaza gets, without meaningful access to the world, life here will be hell," said Mohammed Samhouri, consultant to a Palestinian cabinet committee mulling what to do with vacated settlements.
"If Gaza stays a prison, there is no chance to run it well and Israel can say, 'See, the Palestinians screwed it up. They should be given no more land'," he said, referring to the West Bank which Palestinians want for the bulk of a future state.
Compounding the uncertainty, talks on coordinating security steps for the withdrawal have gone nowhere. The impasse has sown fears of a looting spree in abandoned settlements and a seizure of property by armed groups.
Any such outcome would crimp development prospects offered by a World Bank plan to draw $3 billion from industrialised nations into the region to build an economic basis for peace.
The Palestinian Authority's slowness to tackle rampant internal corruption and incompetence is also a serious impediment to capital investment, economists and diplomats say.
Diplomatic mediators and development agencies urge Israel to invest in high-tech security scanners for cargo crossing Gaza's border as a short-term solution to its security concerns. They also want the Palestinian Authority to control militants.
Reopening Gaza's sole airport, which Israeli forces smashed and shuttered during fighting in 2001, is also seen as crucial for trade and investment. Israel says air traffic could bring arms-smuggling.
NEW FREEDOM
Despite the myriad political and structural problems, Palestinians in Khan Younis derive hope from the mere fact that, very soon, settlers will no longer hem in a city desperate for space in which to grow and prosper.
"We are preparing a big festival timed to the pullout, marking a new freedom for Khan Younis," said Mayor Osama al-Fara, a cousin of the builder, as he unfolded a large, finely detailed map to show a visitor what he has in mind.
Replacing the Gush Katif settlement bloc is a colour-coded grid delineating Palestinian housing projects, agricultural tracts, a zone for schools, a sport and recreational area, shops and tourist facilities along a glorious dune beach.
Fara anticipates pressure from outside business interests to build on scarce fertile land inherited from Gush Katif that he says will be vital to feeding a local population charted to swell from 180,000 to 400,000 by 2025.
The 8,500 settlers now consume more than 15 percent of Gaza, with 1.4 million Palestinians -- more than half of them refugees from wars since 1948 -- crammed into the rest of a territory just 40 km (25 miles) long and 10 km (six) miles wide.
"Population growth may threaten Gaza's future even more than access issues," said economist Salah Abu Shafi. "A solution might be if some Gazans can move to the much larger West Bank if Israel gives us a corridor."
"If not, Gaza will run out of land."