The fragile truce in Gaza is teetering on the brink as Palestinian militants fired more volleys of rockets and Israel pledged tougher military action.
Dozens of mortars were fired but not all exploded
Three Qassam rockets were fired into southern Israel by members of the Hamas movement, but there were no injuries.
Israel's deputy defence minister said the army would be "more aggressive" if rocket and mortar attacks continued.
Violence escalated on Tuesday night when a Palestinian militant was killed in disputed circumstances in Rafah.
Hamas say one of its armed members was killed by Israeli soldiers in a breach of the ceasefire - but the army say he was killed when an explosive device he was carrying went off.
In retaliation, Hamas launched mortars at Israeli settlements in Gaza, triggering the first Israeli air strike since January, in which a second militant is reported to have died.
In the hours that followed, there were more Hamas rocket and mortar strikes. An Israeli settler has been lightly wounded in the attacks.
Prime Minister Ariel Sharon is expected to hold talks with Defense Minister Shaul Mofaz and other senior officials to discuss Israel's response.
Evacuation under fire
Palestinian Authority President Mahmoud Abbas - on a visit to East and South Asia - has warned that the situation is so sensitive that "a very tiny spark" could trigger a major new round of violence.
There has been relative calm since a ceasefire was declared but the Israeli and Palestinian leaders in February.
Angry funerals have fuelled militant anger in Gaza
"We must act in a more aggressive manner than we have so far," Deputy Defence Minister Zeev Boim told Israeli public radio.
"Until now, we have acted with moderation and restraint because we want to have calm in the run-up to the Israeli withdrawal from the Gaza Strip, but it is conceivable to proceed with the evacuation under fire," he said.
Israel is planning to evacuate all its 21 settlements in the Gaza Strip and the troops who protect them as part of a unilateral disengagement plan.
It will maintain control of the borders, airspace and coastline of Gaza, which is home to about 1.5m Palestinians.
Israeli human rights group B'Tselem says at least 3,261 Palestinians and 875 Israelis have been killed in the intifada, or Palestinian uprising, which begin in September 2000.