Israeli forces backed by tanks killed seven Palestinians including five militants and one soldier was also killed in one of the heaviest Israeli raids into the Gaza Strip in months.
Palestinians carry the body of Islamic Jihad militant Mohammed al-Masri, who was killed by Israeli troops today.
Israeli soldiers entered northern Gaza before dawn and fighting quickly erupted around the town of Beit Hanoun, followed by air strikes and tank shelling, witnesses said. They said the army, with air support, had surrounded the town.
The operation was one of the biggest since Israel launched an offensive in Gaza to press for the release of a soldier captured by Palestinian gunmen on June 25th in a cross-border raid and to halt militant rocket fire into Israel.
Palestinian President Mahmoud Abbas claimed Israel was waging "all-out war", and called the operation "despicable".
Prime Minister Ismail Haniyeh of Hamas said he hoped the attacks, which he branded a "massacre", would not derail Egyptian-brokered talks trying to arrange a swap of Palestinian prisoners in Israel for the release of the captive soldier. A delegation from the governing Hamas Islamist movement has been holding negotiations with Egyptian officials in Cairo this week on a possible deal.
In Jerusalem, Prime Minister Ehud Olmert's security cabinet agreed to continue current Gaza operations and step up pressure on Hamas, a government statement said. It did not elaborate.
Israel withdrew its army and Jewish settlers from Gaza last year after a 38-year occupation, but tension began rising along the frontier when Hamas took power after winning January elections. The movement formally seeks to destroy Israel.
Israeli air strikes around Beit Hanoun killed a Palestinian policeman and two gunmen, including one from Hamas, Palestinian security sources said. Three other Hamas gunmen were killed by tank fire and in clashes, witnesses said.
Hospital officials said a civilian was killed in his house by Israeli gunfire. Some 45 Palestinians were wounded, including at least two dozen hurt in ground clashes, hospital officials said.
The Israeli soldier was killed in a gun battle, the army said. Hamas's armed wing said it killed the soldier and wounded several others.
The Israeli military said there was "ground action" in northern Gaza, adding that air strikes were aimed at gunmen. Militants vowed revenge, and later fired six homemade rockets at the Israeli border town of Sderot from northern Gaza despite the Israeli raid.
"Bombardment for bombardment. Blood for blood," the Hamas armed wing said in a statement, which also warned there would be more rocket attacks and said residents should leave Sderot.
"The only thing the Palestinians have exported from the Gaza Strip since September 2005 when Israel left completely have been Qassam rockets," said Israeli government spokeswoman Miri Eisin.
Some 280 Palestinians have been killed in the four-month-old Israeli offensive against Gaza, about half of them civilians. Three Israeli soldiers have been killed.