ISRAEL launched an air strike on the office of Hamas Prime Minister Ismail Haniyeh on Saturday, destroying the building. There were also reports of damage to police headquarters, a mosque and smuggling tunnels.
Rescue workers were also trying to pull as many as 27 people from the rubble of a house in the northern Gaza neighbourhood of Jabalya. They said there might three dead and many more wounded in the attack, believed to be an Israeli air strike.
Death toll mounts in Gaza
Gazans bury their dead on Saturday hours after Israeli aircraft bomb Hamas government buildings while Israel vows to continue its operation.
Israel approved the mobilisation of up to 75,000 army reservists after a long-range missile fired from Gaza landed in an outlying Jerusalem suburb, setting off air raid sirens across the Holy City but causing no casualties.
Bringing the possibility of a ground offensive in Gaza one step closer, the Israel Defence Forces confirmed that a rocket struck an area on Jerusalem's outskirts - believed to be the Gush Etzion settlement. It is the first Palestinian-fired missile to land near the city since 1970.
Israeli tanks and armoured personnel carriers were seen moving towards the border with Gaza, while the IDF announced that the main highway leading to the Gaza Strip and the two roads bordering it would be closed to civilian traffic indefinitely.
IDF chief of staff Lieutenant-General Benny Gantz addressed soldiers massed in the country's south, saying: ''We are here tonight on the eve of a possible ground operation.
''This is not our first time in Gaza. We have been through a few days with very significant attacks on the scale of hundreds of daily targets, and have struck with great force and precision.''
Australian Foreign Minister Bob Carr said Israel and the Palestinians were teetering on the brink of a full-scale war and both sides must pull back before tensions boiled over.
''I understand Israel was already considering ground action,'' Senator Carr said.
''That was before these rocket attacks, so it's a dramatic escalation that has us again, as Australians, calling for both sides to exercise a high degree of restraint. [Let's] have both sides - Palestinians and Israelis - commit to resuming negotiations to get that two-state solution.''
Late on Friday the IDF announced it had targeted two more senior Hamas operatives, Muhammad Abu-Jalal, a Hamas company commander in Al-Muazi, and Khaled Shaer, a senior operative involved in the rocket launch array.
As the conflict ended its third day, the IDF said about 550 rockets had been fired from Gaza since Wednesday, while Israel had hit more than 800 targets in the same period.
Hamas claimed responsibility for launching the Jerusalem missile, which it described as ''an improved Qassam'' called an M-75.
Israeli defence officials say the only rockets in Gaza with a range that could reach as far as Tel Aviv or Jerusalem were Iranian-made Fajr-5 missiles, believed to be part of a supply of weapons from Libya.
''We believe we have caused severe damage to the Fajr-5 capabilities,'' said IDF spokeswoman Avital Leibovich, confirming Israel has been targeting missile stores in its hundreds of air strikes on Gaza over the previous three days.
Jerusalem lies about 80 kilometres from Gaza, the maximum reach of the militants' most powerful missiles.
Despite Israel's promise of a lull in its air strikes during Friday's visit to Gaza by Egyptian Prime Minister Hesham Qandil (if Gaza's militants suspended their rocket fire), the truce did not take hold.
Militants in Gaza fired at least 165 rockets into southern Israeli towns, 99 of them reportedly intercepted by the Iron Dome missile defence system, and Israel responded with air strikes in central and southern Gaza.
Israel said it prepared the residents of Gaza for a renewed onslaught with text messages and the distribution of leaflets throughout the strip warning residents to stay away from known Hamas-associated buildings.
''For your own safety, take responsibility for yourselves and avoid being present in the vicinity of Hamas operatives and facilities and those of other terror organisations that pose a risk to your safety,'' the leaflets read.
Meanwhile, sirens sounded in Israel's commercial capital, Tel Aviv, for a second day and city authorities announced that they were opening bomb shelters in preparation for further hostilities.
Mr Qandil denounced Israel's actions and told Gazans on his visit: ''Egypt will spare no effort … to stop the aggression and to achieve a truce.'' Amid the chaos, many Israelis and Gazans were fleeing to safer ground.
In Kibbutz Reim, just 4.7 kilometres from Gaza, community leaders were urging families with young children to find a haven, said resident Micky Keidar, 43, who left with his wife and two children on Friday.
''The day after the Hamas military leader was killed … we knew all hell was going to break loose,'' Mr Keidar said.
Because the kibbutz is 200 metres outside the zone where the government funds safe rooms in each house, residents were forced to sleep in one of the few reinforced buildings on site - the kindergarten.
At least 30 Palestinians - 10 of them civilians - and three Israeli civilians have been killed in the conflict so far.