Nov. 10 (Bloomberg) -- “I can offer you a discount on the headbands,” said Tareq Abu Dayyeh, souvenir-store owner. “They’re just like the kind used by suicide bombers.”

He was making a sales pitch at his Chairman Arafat Shop, one of Gaza’s most curious commercial outlets. A battery- powered, dancing Osama bin Laden doll occupies a shelf above Barack Obama coffee mugs emblazoned with a misspelling of the U.S. president’s middle name: “Abu Hussain Palestine Loves You.” A plastic Virgin Mary and Jordan River holy water share space with plaques depicting the Dome of the Rock, Jerusalem’s foremost Muslim shrine.

Green flags of Hamas, the Islamic party that took over the Gaza Strip in 2007, stand next to yellow banners of Fatah, the bitter rival Hamas expelled. Che Guevara, the Cuban revolutionary leader, appears on T-shirts.

“‘We have something for everybody, believe me,” said Abu Dayyeh, 31, who started working in the store in 1994 when his father founded it.

Since then, the shop has been a one-stop barometer of Palestinian fortunes, selling kitsch that chronicles war, political infighting and Gaza’s isolation since 2006, when Israel began to blockade the coastal strip.

When the store opened, it was called the PLO Flag Shop and the souvenirs reflected hope. Yasser Arafat, the late Palestine Liberation Organization leader, had returned from exile to take control of parts of Gaza and the West Bank. Peace seemed to be on the horizon and in tribute, the shop displayed little crossed Israeli and Palestinian flag pins and key chains, Israeli flags and menorahs, the candelabra that is a symbol of Judaism.

A big seller was an inflatable vinyl pillow imprinted with Arafat’s smiling face. One that was purchased in 1995 deflated after a few months.

Saddam Posters

Israeli-themed mementos fell out of favor in the late 1990s as peace talks foundered, the Israeli settlements expanded and Hamas carried out a suicide-bomb campaign inside Israel. Posters of Saddam Hussein, who supported Palestinian liberation, were the rage.

“When things were good, everyone thought that Gaza was going to become the next Singapore; instead, it became the next hell,” Abu Dayyeh said, adding that he’ll take five shekels ($1.33) for a Saddam poster now.

Sales of United Nations flags were stimulated in 2000 when the Palestinians launched a revolt that included waves of suicide attacks on Israel. Schools and hospitals bought the flags to fly in the hope that Israel’s retaliatory air raids wouldn’t target them. Israeli flags were also popular -- for burning at rallies.

‘Free Gaza’

Some optimism returned in August 2005. Israeli troops withdrew from the Gaza Strip and shut down the settlements. “Free Gaza” T-shirts celebrated the changes.

The upbeat mood didn’t last. In 2006, Danish flags became a hot item, purchased to torch in protest of cartoons depicting Muhammad, the prophet of Islam, published in a Denmark newspaper. That summer, Hezbollah, the Lebanese militia and party, fought a 33-day war with Israel, and its leader Hassan Nasrallah became a subject of heroic portrait posters.

In late 2007, Abu Dayyeh introduced a coffee mug that commemorated the Annapolis peace process President George W. Bush initiated to spur Israeli-Palestinian talks. A message printed on the outer surface presaged the negotiations’ eventual breakdown, telling buyers of the souvenir to “Break This Mug” if the conference failed.

“Buy five, get one free, and you’ll have plenty to smash,” Abu Dayyeh said.

Bombed Building

The shop is on Gaza’s main boulevard across from the Palestinian parliament building that Israeli bombs flattened during the 2008-2009 war against Hamas. Business now is limited mostly to Hamas orders for Dome of the Rock plaques to give wounded veterans, headbands and flags for parades, and posters announcing the death of a war “martyr.”

Some goods are made in China, some in Gaza. The dancing bin Laden was fashioned out of an electric St. Nick. The latest mugs bear the logo “SMILE You are in Largest Jail on Earth Gaza.”

Fluctuations in Palestinian politics dictate the shop’s interior decoration. A portrait of Hamas Prime Minister Ismail Haniya replaced a poster of Mahmoud Abbas, president of the Palestinian Authority, at the back of the store in 2007, when Hamas’s militia defeated forces loyal to Abbas.

‘Take Abbas Down’

“Hamas people told us to take Abbas down,” Abu Dayyeh said. “The customer is always right!”

A diligent search yields a “Mahmoud Abbas President of Palestine” mug, lodged behind a row of the Obama cups.

A picture of Arafat hangs next to Haniya. Even with Arafat’s long-standing opposition to Hamas, he can still be displayed because he is a sort of patron saint of Palestinian nationalism, Abu Dayyeh said.

Personal photos round out the carefully balanced décor. One shows Abu Dayyeh as a teenager posed beside Arafat. A second is of his own son posing with Haniya.

“That way everybody is happy,” Abu Dayyeh said.

To contact the reporter on this story: Daniel Williams in Gaza at dwilliams41@bloomberg.net.

Last Updated: November 9, 2009 17:01 EST