Four Palestinians have been killed and more than 20 injured after Israelis fired into the Gaza Strip following an attack on an army patrol jeep which injured four Israeli soldiers.
Israel's military said four of its soldiers were wounded in Saturday's missile attack, including one seriously.
Ashraf al-Kidra, a Gaza health ministry spokesman, said all four Palestinians killed were civilians between the ages of 16 and 18 and that among the 25 wounded were children.
The military wing of the leftist Popular Front for the Liberation of Palestine (PFLP) took responsibility but it still remains unclear whom in fact was behind the attack. The PFLP often takes credit for attacks that later turn out to be the work of Hamas or Islamic Jihad militants.
Gaza militants often fire rockets from the Israel-Gaza border area toward nearby Israeli communities and low level clashes with the Israeli military are common. But when casualties are involved, particularly civilians, the potential for escalation grows significantly.
Both sides threatened retaliation, and previous such incidents have unfolded into days of Palestinian rocket attacks and retaliatory Israeli strikes.
On Saturday, a pair of Palestinian rockets landed in an open field in southern Israel. The Israeli military informed residents to stay close to home in case of further rocket attacks.
Witnesses said that following the large explosion that started the incident, Israel retaliated with tank and machine gun fire toward residential areas at the al-Muntar hill in the central part of the territory, hitting people who were returning from a funeral east of Gaza City.
Rami Harra said his 17-year-old brother Muhammad Harra was killed in the strike.
"He was at home when the explosion took place. He went out to see what happened and when he started to help evacuating wounded people who were on the ground another shell hit the place and killed him," he said outside the morgue.
"Why did they kill him? I can't believe my eyes that I am seeing his dead body."
In a first response to Saturday's incident, Israeli Defence Minister Ehud Barak said the military had responded aggressively to the attack and will "consider further reaction in the coming days."
"We will not allow the escalation on the fence to go unanswered," he said.
The Israeli military said it holds Gaza's Hamas rulers responsible for the attack and that it "will not tolerate" such incidents.
In a text message to reporters, Hamas spokesman Fawzi Barhoum threatened to respond.
"Targeting civilians is a dangerous escalation that cannot be tolerated. The resistance has the full right to respond to the Israeli crimes," he said.
Israel carried out a broad military offensive in Gaza nearly four years ago in response to years of near daily rocket fire. Major salvos from Gaza have subsided since then, but sporadic rocket fire has continued.
Gaza's Islamist Hamas rulers have largely refrained from rocket attacks since the devastating Israeli military offensive that killed hundreds of Palestinians.