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Dahaniya was located in a no man's land between Israel and the Gaza strip, in between the Israeli kibbutz of Kerem Shalom and the Palestinian city of Rafah, south of Yasser Arafat International Airport (also called Dahaniya Airport) and close to the Egyptian border. It had been administered by the Israeli Civil Administration since the Oslo accords.
Dahaniya was founded in 1977 as a sanctuary for Bedouin collaborators with Israel from the Sinai Peninsula. in 1976 The elders of the Egyptian-Bedouin tribe had reached an agreement with the Israeli government regarding exchange of land. They had given Israel property rights for land in Sinai on which to found villages, and in exchange, they had been given the rights to the village of Dahaniya. Hundreds of Bedouin families from the Sinai desert found refuge there.
In the following decades, the residents of Dahaniya collaborated with Israeli security forces in their efforts to locate terrorists, and families of collaborators from the West Bank and Gaza Strip joined the village. In 1994 many of the residents left the village to the larger cities in Israel (including Tel Aviv and Beersheba).
The Palestinians considered the residents of Dahaniya traitors and worthy of execution, and it was nicknamed the "village of the collaborators". Since the beginning of the Second Intifada, Dahaniya residents feared for their lives. Village residents were banned from entering the Gaza Strip, the village was ringed by a security fence, and the entry and exit into the village was administered by Israel. Among the Palestinians who would enter the village regularly were teachers, doctors, water and electricity workers and traders. The Kerem Shalom border crossing was used by residents working in Israel and the Gush Katif settlements. Some of the residents held Israeli documents, while others held Palestinian documents (issued by the Israeli Civil Administration).
During the Israeli disengagement from Gaza in 2005, the village's residents were evacuated to Israel. All of the buildings in the village except for the mosque were subsequently destroyed by Israeli bulldozers.