Troops and tanks on Sunday massed in preparation for an attack, but Israeli political sources said they were unlikely to move before US Secretary of State Condoleezza Rice visits to try to salvage a crumbling five-month-old ceasefire.
The worst surge in bloodshed since the truce was agreed has threatened to hamper Israel's withdrawal from Jewish settlements in occupied Gaza, starting next month, and amplified doubts over prospects for peacemaking.
Israeli Prime Minister Ariel Sharon said he had instructed the army "to act without limitation to stop the strikes on Israeli communities" after rocket and mortar salvoes continued despite an appeal by Palestinian President Mahmoud Abbas.
In the southern Gaza Strip, Saeed Seyam, a commander of the Hamas resistance group that is behind much of the rocket fire, was killed by a bullet fired from a nearby settlement.
His father said he had been going to water the garden. The Israeli occupation army said it had killed him as part of a revived assassination policy.
"Hamas will not stand handcuffed against the new crime," said spokesman Mushir al-Masri.
Israeli forces have killed nine
Hamas fighters in recent days
Israeli troops also said they killed another fighter nearing a settlement in central Gaza. There was no Palestinian confirmation.
In northern Gaza, an Israeli aircraft fired missiles at a car carrying three Hamas fighters leaving a site in Bait Lahya used to fire rockets at Jewish settlements, Aljazeera reported.
The fighters jumped out of the car, but one was wounded by shrapnel, witnesses and medics said. The Israeli army had no comment.
Palestinian mortar fire wounded six Israelis in southern Gaza settlements. Hamas said it had fired them in retaliation for the killing of Seyam.
Soon after, witnesses said two Palestinians were wounded by tank fire.
Troops, tanks and armoured vehicles have massed, ready for an offensive into the Gaza Strip, and discussion of when it could begin dominated Sharon's cabinet meeting.
But political sources said Israel was likely to give Abbas more time to bring Palestinian attacks to a halt. "There are signs that the situation could be defused," said one.
Egyptian officials met Hamas leaders in Gaza to try to shore up the truce. Rice is due in the region at the end of the week.
Washington wants to preserve the ceasefire and supports Israel's withdrawal from Gaza, seeing it as a possible springboard to renewed talks on its "road map" peace plan.
"Hamas will not stand handcuffed against the new crime"
Israel has not launched a largescale offensive into the Gaza Strip since the death of Palestinian leader Yasser Arafat last year.
Abbas wants to avert an Israeli incursion into Gaza but has to tread carefully against Hamas. Gun battles on Friday between Hamas and Palestinian police trying to stop the rocket fire raised fears of civil war.
Senior Palestinian negotiator Saeb Erikat said an Israeli ground incursion into Gaza "would have only disastrous results on the prospects for the Gaza disengagement and on the peace process as a whole".
Sharon, who ordered the army to step up action against fighters after a bombing and rocket attack killed six Israelis last week, has vowed not to quit Gaza under fire.