Israel has killed at least four Hamas members in a missile strike and moved artillery cannons to the Gaza Strip border.
On Saturday afternoon, Israeli aircraft fired five missiles at two cars in the al-Zaitun neighbourhood of Gaza City, but there were conflicting reports on the number of casualties.
The Palestinian Interior Ministry said two were killed, while medical officials and radio reports said four were killed. Nine people were wounded.
Palestinian Information Minister Nabil Shaath denounced the strike as an "act of criminal aggression". He also accused Israel of trying to destroy a temporary ceasefire that has largely held since February.
The Israeli army said Saturday's air strike hit two vehicles, one carrying weapons and the other carrying Hamas members.
It said it would "continue to act with determination" to protect Israeli citizens and called on the Palestinian security forces to prevent further attacks from the Gaza Strip.
Hamas vowed to avenge the attack, calling on its members to strike Israel "in every spot of our occupied land".
While respecting the ceasefire agreed to in February, the group maintains it has the right to respond to alleged violations by Israel.
Israel also on Saturday sealed the West Bank and Gaza Strip, barring all Palestinians from its territory, and promised a "crushing" response to the first major Hamas rocket barrage on Israeli towns since Israel's pullout from Gaza two weeks earlier.
Ariel Sharon on Saturday evening convened a meeting of his security cabinet to approve the military response, expected to last for several days, although a large-scale ground operation appears unlikely.
Border deployment
Israel also set up five artillery cannons on the Gaza Strip border, near the Israeli communal farm of Nahal Oz.
Seven armoured personnel carriers guarded the cannons, and soldiers appeared to be settling in, setting up a command post and rolling out barbed wire.
At another border staging area, near the Israeli communal farm of Miflassim, four armoured personnel carriers, five tanks and four huge D-9 bulldozers joined about 30 armoured vehicles that are regularly deployed there.
In Gaza City, several loud sonic booms were heard throughout the day as Israeli warplanes flew overhead, emitting white smoke.
Frantic residents ran for cover, but no casualties were reported. Palestinians accused Israel of launching "fake" air strikes to terrify the population.
PHOTO CAPTION
An Israeli soldier patrols between tanks near the Kibbutz Mefalsim outside the northern Gaza Strip September 24, 2005. (REUTERS)