(Updates with Israeli Defence Ministry, detail)

By Nidal al-Mughrabi

GAZA, Oct 28 (Reuters) - Israel began reducing fuel supplies to the Gaza Strip on Sunday under new economic sanctions to punish the Hamas-controlled Palestinian enclave for rocket fire on Israeli towns.

"In line with the Israeli government's decision, the Defence Ministry will this week begin cutting fuel supplies to the Gaza Strip by between 5 and 11 percent, depending on the type of fuel," an Israeli security source said.

Palestinian officials had already complained on Sunday that deliveries of fuel oil for Gaza's power station, as well as diesel and petrol, were cut by between a quarter and a half.

There was no immediate obvious impact on electricity supply.

An official from the European Union, which funds fuel oil to Gaza's only electricity generating plant, said deliveries to the plant were down by about a quarter but it had stocks for some seven days of operation. Power demand tends to ease at this time of year, as air conditioning use decreases.

Israeli Prime Minister Ehud Olmert has said he will not allow a "humanitarian crisis". Officials say Israel will take care to ensure supplies for medical and other vital facilities in Gaza, which last month it declared to be an "enemy entity".

Hamas, the Islamist group whose violent seizure of control in the territory in June triggered a virtual closure of its borders, condemned Israel's "blackmail".

"The ... bid to strangle the Palestinian people will create an explosion that will blow up not only in the face of Hamas but affect the entire region," Hamas spokesman Fawzi Barhoum said.

Under pressure to act against rocket attacks at a time when the government is also being criticised for talking peace with Hamas's Palestinian rivals in the West Bank, Defence Minister Ehud Barak last week ordered gradual cuts in energy supplies.

Makeshift rockets have killed two Israelis this year.

The United Nations has cautioned Israel against imposing "collective punishment" on Gaza's 1.5 million people.

Israeli officials said the government was still reviewing its legal position -- Palestinians argue that, as Israel continues to control Gaza's frontiers since withdrawing troops in 2005, it still has the obligations of an occupying power under international law to ensure the welfare of the population.

COURT REVIEW

An Israeli court is reviewing the sanctions, the security source said. He added that Israel had closed the Sufa crossing point, one of the few passages for goods since the main cargo clearing terminal was closed when Hamas seized power.

The Palestinian Authority led by President Mahmoud Abbas in the larger West Bank, which has cut off relations with Hamas, has called on the international community to intervene to protect the civilian population of the Gaza Strip.

An association for fuel merchants in Gaza said only about half the day's deliveries of petrol and diesel had been made.

Mojahed Salama, head of the Palestinian Authority's Petrol Agency based in the West Bank, said Sunday fuel imports showed a 40 to 50 percent reduction in diesel and petrol supplies and a 12 percent reduction in fuel for the power plant in Gaza.

A spokesman at Israeli fuel supply firm Dor Alon said it was implementing orders received from the Defence Ministry. (Additional reporting by Dan Williams, Adam Entous, Ori Lewis and Alastair Macdonald in Jerusalem)

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