AITA AL SHAAB - Sitting on his veranda overlooking the hills stretching towards the Israeli border, Ali Awada was one of the first to notice something wrong. "I heard a lot of explosions and saw smoke. We thought it was just a small clash but later it got really bad."

What he saw was the fighting sparked by a cross-border raid by the Lebanese Shia Hizbollah movement on July 12 last year. Three Israeli soldiers were killed and two captured in the attack, igniting a month-long conflict that left about 1,200 Lebanese and 160 Israelis dead and had far-reaching political repercussions in both countries.

The Lebanese government estimates direct damage to infrastructure at $3.6bn (£1.77bn, €2.6bn) and that about 107,000 houses and shops were damaged or destroyed. The issue of how to compensate victims of the war and pay for reconstruction has become highly politicised as Hizbollah and the western-backed government of Fouad Siniora, prime minister, vie for supremacy.

Mr Awada has just finished rebuilding his home which, like most of the houses in the district, was largely destroyed. His was one of the first to be rebuilt, which he attributes to the good fortune of having a son in the construction business.

In the immediate aftermath of the war, Hizbollah provided Mr Awada and many others with $10,000 (£4,911, €7,260) for furniture and alternative accommodation. He also received $30,000 from Qatar towards the rebuilding of his home. Aita al-Shaab is one of fourtowns in southern Lebanon adopted for reconstruction by the wealthy Gulf state. "I didn't get any money from our own government," says Mr Awada.

Hizbollah claims to have spent more than $300m on reconstruction, using funds donated by Iran. The government said last month it had spent $318m on rebuilding, but that it had received only $707m of the $1.3bn pledged by mainly Arab donors.

In response to concerns about inefficiency and corruption, the Lebanese government allowed other countries to take direct charge of many reconstruction projects after the war, rather than channelling aid through the state bureaucracy.

This may help explain why the government is regarded as virtually absent by the people of the south and in the southern suburbs of Beirut, where most of the damage was concentrated. Both are Hizbollah strongholds where there is fierce resentment against the Sunni-dominated government.

Ali Bazzi, mayor of Bint Jbeil, another town that was the scene of heavy fighting whose reconstruction has been funded by Qatar, is scathing about the government. After the war, the only official who came to help was Hizbollah's Moh-am-med Fneish, then minister of energy and water. "The next day the electricity was reconnected," he says.

Hizbollah and its allies walked out of the cabinet last November, leaving the government without any Shia representation. Part of Hizbollah's anger against the government focused on the government's alleged desire to see the movement destroyed by Israel during the war - a charge the government categorically denies.

In the devastated southern suburbs of Beirut, collectively known as Dahiyeh, Bilal Naim, the Hizbollah official in charge of economic aid, is angry about what he says is the government's unwillingness to help Shia and pro-Hizbollah areas. "The government received $1.3bn from the Gulf countries. They have enough money so they should pay," he says.

He adds that the reconstruction of Dahiyey, which Hizbollah has said it will oversee, will cost $350m to which the government should contribute 80 per cent. About 5,000 apartments in 260 buildings were destroyed and only three per cent of the people have so far received compensation, says Mr Naim.

A glimpse inside Lebanon's ministry of the displaced, which is in charge of compensation for the centre and north of Lebanon, reveals why some of the aid may be slow in coming. The bureaucracy is still preoccupied with sorting out claims from the country's 1975-1990 civil war.

By comparison, work on last year's war is proceeding at a lightning pace. Of the 30,000 destroyed or damaged units, including shops and homes in the centre and north of the country, 18,000 have been surveyed. Compensation has been approved in more than 4,300 cases and almost 1,800 people have received a cheque, says Rima Farah, a spokeswoman at the ministry. Of the $40m approved so far, $17m has been disbursed.

Most of those who have received compensation from the ministry are from -Dahiyeh, says Ms Farah, although she admits that this is still only a drop in the ocean. As to the perception that the government is discriminating against some groups, all she will say is: "Well, this issue has become very political."