Hamas officials, who took full control of the territory in July, said the fighters had been targeted with Israeli tank fire or a missile fired from an aircraft.

Dr Muawiya Hassanin of the Palestinian Health Ministry said that the Palestinian fighters had shrapnel wounds consistent with heavy artillery fire.

Ten fighters were among the wounded, Hamas said.

The Israeli army, however, said troops inside Gaza shot at a group of fighters who approached them, sparking an exchange of fire.

Public pressure

Israel's security cabinet on Wednesday rejected calls for a large-scale Gaza invasion but the government is under mounting public pressure to stop Palestinian fighters firing rockets into southern Israel.

Earlier this week a rocket landed in the yard of a nursery school in the town of Sderot. No one was hurt, but images of panicking parents rushing to collect their children prompted renewed calls for government action. 

The parents in the town kept their children home from school again on Thursday, demanding better protection from the attacks.

About 250 Sderot residents demonstrated outside the office of Ehud Olmert, the Israeli prime minister, during Wednesday's security cabinet meeting, demanding that he resign.

Military action

Instead of military action, the cabinet threatened to cut water, electricity and fuel supplies to the Gaza Strip.

"Imagine if al-Qaeda took over Gaza ... Would anybody suggest we provide them with infrastructure?"
Haim Ramon, Israeli vice-premier
Later in the day, however, Ehud Barak, the defence minister, told a gathering of senior defence officials that "there is recognition that in the end, Israel will have to operate inside the Gaza Strip," participants at the meeting said on condition of anonymity.

Israel has mounted such operations in the past, with casualties on both sides, but the large-scale military strikes have failed to stop the rocket attacks.

Israeli military experts have suggested that there is no military solution to the rocket attacks other than recapturing all of Gaza. Israel withdrew from the territory in 2005.

Israel's cabinet is expected to further discuss its options at its next meeting.

'Enemy country'

Haim Ramon, Israel's vice-premier, who first floated the idea of cutting off fuel and electricity, said the takeover of Gaza in June by Hamas has turned the strip into an "enemy country," and Israel has no obligation to help.

"Imagine if al-Qaeda took over Gaza," Ramon said. "Would anybody suggest we provide them with infrastructure?"

The tactic could backfire, however, since cutting off vital supplies could cause widespread suffering and would likely bring harsh international condemnation.

Fawzi Barhoum, a Hamas spokesman, said his group was "looking with great concern at this serious and dangerous Israeli threat," which he termed "a new escalation against our people.