When Hamas held its annual anniversary celebrations in the centre of Gaza City it looked like a defiant and celebratory show. There was a male choir in camouflage fatigues singing on the stage, a sea of green flags in the crowd and wave after wave of self-congratulatory chanting: "Far and wide, Hamas is shaking the ground."

A year after Israel's devastating three-week war in Gaza, the Palestinian Islamist movement which controls the strip is still very much in charge and unbowed.

"No one imagined that after such a crucial war against our people and our resistance that anyone could plan such a proud anniversary as this," Ismail Haniyeh, a Hamas leader and former prime minister, told the crowd.

His defiant rhetoric celebrated the movement's 22nd year, pledged never to recognise Israel and claimed the whole of historic Palestine for the Palestinians. "Palestine from the sea to the river, we won't surrender it," he told the crowd.

But his words barely captured the reality of Gaza today. Israel launched its war a year ago, saying it was compelled to act to halt militant rocket fire from Gaza. After three weeks, 1,387 Palestinians were dead, most of them civilians, according to the Israeli rights group B'Tselem, although Israel disputes those figures.

Thirteen Israelis were killed. Thousands more Palestinians were left homeless and hundreds of factories were destroyed. Israel has kept up its economic blockade, which has prevented imports of reconstruction materials. Earlier this month the UN Relief and Works Agency, the main aid agency in Gaza, presented a family with a new home. It was built from mud bricks.

For Hamas, the war itself has brought other changes. Despite Haniyeh's constant talk of resistance, the number of rockets fired out of Gaza has fallen dramatically this year. Hamas has announced that nearly all factions have agreed to halt the rockets and one Israeli paper reported this month that rocket fire from Gaza was down 90% compared to last year. Haniyeh himself hinted at this new stance in his anniversary speech. "The resistance is strong and hitting everywhere, but we are more wise and more managed," he said.

Mustapha Sawaf, a former editor of a Hamas newspaper, said this was simply a decision made "in the national interest". Others put it differently.

"When Hamas entered the Palestinian legislative elections their slogan was a mix of resistance and politics. It has completely failed," said Mkhaimar Abusada, a political scientist at al-Azhar University in Gaza. "Hamas knows resistance is going to cost them their regime in the Gaza strip."

As Hamas has moderated its militancy so it has faced internal challenges from hardliners in Gaza demanding the movement take a tougher stance and institute a more rigidly Islamic code. Hamas has tried to reimpose control, often earning the rebukes of fellow Gazans.

Although Hamas will not recognise Israel, it is deep into indirect negotiations over a prisoner swap that would see an Israeli soldier captured three and a half years ago freed in return for hundreds of Palestinian prisoners. At the same time, while Haniyeh said Hamas would never recognise Israel he also repeated a previous call for a Palestinian state in the occupied territories alone.

In Israel, meanwhile, there is a sense that the war was their success, but that another round of conflict is inevitable. Yoav Galant, the general in charge of Israel's southern command, noted recently how the rocket fire has dropped off. "I can say that this has been the quietest year for the south in the past decade," he was reported as saying. "It can last for months or years, but ultimately it is going to be broken."

For Israeli analysts the diplomatic fallout for Israel that followed the war, including accusations against both sides of war crimes by Judge Richard Goldstone's UN report, is manageable and has not affected Israel's most important international relationship, with the US. Still, many Israelis are frustrated that their military was singled out for criticism, even as civilians in Iraq and Afghanistan are dying at the hands of western armies. Others worry that Israel's strategy towards Gaza is still unclear and undetermined.

"What will happen is that we will muddle through as usual," said Shlomo Brom, a retired general and an analyst at the Institute for National Strategic Studies in Tel Aviv. "Eventually it is going to explode. Nobody will do anything, but when there will be a crisis we will deal with the crisis."

For those living in Gaza today, the strip is already in crisis as a result of Israel's siege. Hamas has allowed a tunnel smuggling economy under the Egyptian border to develop, skimming a profit off for itself and preventing outright economic collapse.

But it has brought de-development: most of the strip's factories are still empty and unused, the population is increasingly aid dependent and there are barely any long-term development projects. Nearly $5bn(£3.13bn) was pledged by the world for the Palestinians after the Gaza war. On the ground here there is little evidence of it.

"We are moving backwards. Now we depend completely on what we receive from Egypt," said Amjad Shawa, a Palestinian aid agency co-ordinator. He talks about the hidden traumatic cost of the blockade and the sense of powerlessness many Gazans now feel.

At the same time he fears the growing detachment from the West Bank and the disintegration of the Palestinian national movement. "The issue for Gazans is not only humanitarian," he said. "It's not that we need food only. Gazans are looking for their freedom."