By Simon Ingram BBC World Business Report

The gemstone and jewellery industry has undergone a sharp and painful contraction over the past few months.

The United States represents 50% of the global market for cut gemstones and the collapse in US consumer confidence since the 11 September terrorist attacks has had serious implications for the industry.

The impact on Thailand, one of the world's biggest suppliers of gemstones, has been particularly acute.

The recession of the past six months has seen up to 200,000 Thai gem and jewellery workers lose their jobs.

Number one in cut gemstones

Sapphires, rubies and diamonds have earned Thailand its place at the heart of the world's gemstone and jewellery industry.

Despite the exhaustion of Thailand's own mines, a plentiful supply of low-cost skilled labour has helped the country remain a leading exporter of cut gemstones.

According to official Thai sources, total exports for 2001 were $700m.

But that only represent the reported exports.

What is leaving the country illegally is anyone's guess, but given the nature of the product - small yet very valuable - the amount could be huge.

Haggling on the pavement

Chantaburi is a mainstay of an industry which employs up to half a million people nationwide, a town where precious stones are a way of life.

Gem street is a bustling place where dealers have been coming for generations to cut deals over precious stones.

Dealers do business right out on the pavement, sitting in front of little piles of rubies and sapphires, haggling over the price, just as though they were fruit or vegetables.

The trading system is simplicity itself.

The buyers - some from as far away as Taiwan, Korea and Europe - sit at tables and wait for the sellers to bring them whatever stone it is they're looking for.

Alternative markets

Jieb Nansakorn, who trades in Gem Street every weekend, says the market has been unusually quiet of late.

She says the foreign dealers just aren't coming the way they used to.

Even the buzz and glamour of the recent gem and jewellery fair in Bangkok couldn't disguise the still painful repercussions of last September's terrorist attacks in New York and Washington.

With the fall in demand from the US, gemstone dealer Haresh Kumar is looking for buyers elsewhere.

This morning, he's receiving visitors from Taiwan, enquiring about the price of his yellow sapphires.

But Mr Kumar says a revival in the American market is crucial to his company's fortunes.

Increasing competition

And Thailand faces a dangerous new rival in the Asian gem market.

China's gem-cutting industry is still relatively undeveloped, but already its low-cost stones are beginning to flood the market.

John Cook of Jewellery World Review says Thailand could soon be losing out to its giant neighbour as China is growing in strength in the market.

"There's a lot of competition between China and Thailand, even though Thailand has in fact better craftsmen and better craftswomen, even though you have to say that very quietly," he said.

It is a compliment that is of little comfort to the gem cutters back in Chantaburi.

For those in the Thai gem and jewellery industry who have lost their jobs a return to vigour of the US and European economies can't come soon enough.