Israeli troops have made their deepest push yet into Gaza since the beginning of the 18-day-old conflict, as Palestinians prepare for another night of heavy shelling.
The Israeli military said on Tuesday its air force had hit what it described as 60 Hamas targets overnight, while 19 rockets were fired from Gaza into southern Israel in the same period.
Israeli jets have continued to pound the city of Rafah in southern Gaza near the border with Egypt.
Israel is using "bunker-busting" bombs in an attempt to destroy underground tunnels it says have been used to smuggle weapons and goods into the blockaded Gaza Strip.
Ayman Mohyeldin, Al Jazeera's correspondent in Gaza, said tens of thousands of Palestinians had fled their homes after the Israeli military dropped leaflets warning them of intensive air strikes.
"A large part of Rafah has been completely reduced to rubble... it has been described as hell on earth"
Ayman Mohyeldin, Al Jazeera's correspondent in Gaza
"A large part of Rafah has been completely reduced to rubble... it has been described as hell on earth by some of the witnesses we have met," he said.
Moyheldin said Israeli troops were also closing in on Gaza City, which is now surrounded by both tanks and navy vessels along the coast.
He said the Israelis appeared to be intensifying their assault on Gaza City after dark.
"The pattern [that is emerging is] the Israeli military engaging overnight in fierce fighting and then by early morning the military returns to its position.
"As the sun sets around us that's what many Palestinians are bracing themselves for - another night of deadly and intense firing," Mohyeldin said.
Israelis 'softening up' targets
Mohyeldin said there was speculation that Israeli soldiers were limiting their operation during the day because of stiff resistance from Palestinian fighters on the ground during daylight hours.
Many also suggest that the Israelis might also be looking to "soften up" what they believe to be Hamas targets - such as booby-trapped homes and weapons stores.
Al Jazeera - the only international broadcaster with journalists based both inside Gaza and Israel - reported on Tuesday that the heaviest fighting between Israeli and Palestinian fighters was in Tal al-Hawa, in the south of Gaza City.
Serious clashes were also reported in Beit Lahiya, to the north of the city, and east of Khan Younis.
The AFP news agency reported Israeli tanks, supported by warplanes, had moved into several southern neighbourhoods of Gaza City and that Palestinian fighters were responding with mortar fire.
A spokesman for the Palestinian health ministry said dozens of calls for ambulances had been received, but none could be dispatched because of the fighting.
Combat continued despite another day of pleas from both the United Nations and the European Union to stop the violence, which has so far killed around 970 Palestinians and wounded 4,300 others.
Civilians make up about 40 per cent of casualties, with the majority of those being women and children.
Expressing frustration at the failure of both sides to adhere to a legally binding UN resolution calling for an immediate ceasefire, Ban Ki-moon, the UN secretary-general, said he planned to visit the region in a bid to help end Israel's air and ground offensive in Gaza, as well as Hamas rocket fire into southern Israel.
"To both sides, I say: just stop, now," the UN chief told a news conference on Monday. "Too many people have died. There has been too much civilian suffering. Too many people, Israelis and Palestinians, live in daily fear of their lives."
But Ehud Olmert, the Israeli prime minister, said the offensive which includes the latest deployment of reservists into Palestinian neighbourhoods, must continue until Hamas is completely disarmed.
He said the military operation would end once Hamas's military wing halted its rocket attacks.
"We want to end the operation when the two conditions we have demanded are met: ending the rocket fire and stopping Hamas's rearmament. If these two conditions are met, we will end our operation in Gaza," he said in the southern Israeli town of Ashkelon.
|The Swiss Red Cross has criticised the Israelis for 'targeting Palestinian ambulance crews'
The Israeli military said air raids were carried out on at least 25 targets across the Gaza Strip and Shimon Peres, the Israeli president, said on Monday that the army had "achieved in 16 days what no other country in the world fighting terror has done in 16 years".
Ismail Haniya, the Hamas leader and ousted Palestinian prime minister, said that Israel would not emerge victorious from Gaza City.
"This holy blood that has been spilt will never be in vain, it will make the victory. The children's and women's blood and bodies will be a curse which will haunt this occupation," he said.
Meanwhile, Christer Zettergren, the secretary-general of the Swedish Red Cross, said seven ambulances operated by the Red Crescent were damaged last week in Gaza.
Zettergren on Tuesday accused Israeli soldiers of firing at emergency crews and described the shootings as "very deliberate".
He is due to travel to the region on Wednesday to donate 10 ambulances to the Red Crescent.
Also on Tuesday, the AFP news agency reported that the US military had been forced to cancel a shipment of munitions from a Greek port to a US warehouse in Israel because of objections from Athens.