Palestinian militants have called off their truce and vowed to take revenge for the killing by Israel of one of their leaders in Gaza.
Hamas supporters in Gaza City threatened retaliation
Tens of thousands of Hamas supporters filled the streets of Gaza City, chanting "God is great!" and firing machine guns in the air.
In a statement, Hamas' military wing urged its "fighters in Palestine to strike in every corner of the Jewish state" following the death of Ismail Abu Shanab and two of his bodyguards.
The three men died when the car they were travelling in was hit by up to five missiles fired from Israeli helicopter gunships, witnesses said.
Palestinians in the Gaza Strip later fired more than a dozen mortar bombs and several rockets at Jewish settlements inside the Strip and at Sderot, a nearby Israeli town.
Witnesses said the shelling caused slight damage but no casualties.
In the West Bank, Israeli tanks and troops entered the city of Jenin for the second consecutive night, witnesses said.
ISMAIL ABU SHANAB
Represented Hamas at meetings with the Palestinian PM on a Hamas truce
Spent time in Palestinian Authority detention
Studied in the US and appeared often in American media
Palestinian security sources quoted by the AFP news agency said the incursion triggered heavy exchanges of fire.
The killing of Abu Shanab came hours after the Israeli Government decided to take military action against Palestinian militants following a suicide bombing in Jerusalem on Tuesday, which killed 20 people.
Within minutes of the Gaza attack, Hamas and Islamic Jihad declared an end to the temporary truce they announced on 29 June.
Both Hamas and Islamic Jihad claimed responsibility for the Jerusalem bombing.
Roadmap in peril
The upsurge in violence threatens to derail the US-backed roadmap for peace, accepted by Israel and the Palestinians as a way to end the three-year-old conflict.
US Secretary of State Colin Powell said the attack did not mean the end of the roadmap and said both sides must recommit themselves to it.
Abu Shanab's car was hit by up to five missiles
He also called on Palestinian leader Yasser Arafat to work with his prime minister, Mahmoud Abbas - also known as Abu Mazen - and use his security forces to take decisive action against Palestinian militant groups.
Abu Mazen said the Israeli attack would undermine plans by the Palestinian Authority to rein in the militants, which it announced in the wake of the Jerusalem bombing.
Hamas founder Sheikh Ahmed Yassin warned Israel would "pay the price for the crimes of [Israeli Prime Minister Ariel] Sharon".
In a statement from Beirut, Lebanon, the group said its response would be "earth-shaking".
'Lesson for Hamas'
Israeli Deputy Prime Minister Ehud Olmert said Shanab was "a murderer".
"I hope [Shanab's death] is a lesson for the Hamas people. But it isn't enough, we have to get to each and every Hamas leader," he said.
Hamas and Islamic Jihad said they bombed the Jerusalem bus
While some correspondents say Shanab was a moderate from the political wing of Hamas, an Israeli security source told AFP that he was one of those directing the group's military activities.
"The killing of Abu Shanab has saved many, many Israeli civilians and casualties," the source said.
Palestinian witnesses say up to five missiles were fired at the car as it drove through the centre of Gaza City.
Witnesses said the car, a gold-coloured station wagon, blew up.
"I threw myself under a table in my shop, and the explosions continued," said Naim Shaban, who owns a metal workshop nearby.
"Flames were coming from everywhere. When it stopped, I saw one helicopter turning west, toward the sea. I rushed to the car, and saw people burning inside," he said.
Hundreds of angry Palestinians gathered at the scene, as rescue workers removed three charred bodies from the wreckage.
A senior Hamas official, Ibrahim Hanieh, said the truce was effectively over and the group would retaliate.
"We consider ourselves free from this ceasefire," he said.
Reuters quoted Khaled al-Batesh, an Islamic Jihad official as saying that "by assassinating Abu Shanab, Sharon ended the truce and announced its death."