At least 20 Israeli tanks accompanied by bulldozers and attack helicopters have sealed off parts of northern Gaza.
Israel's army has tried to stop rockets attacks from Gaza
The armour took up position overnight outside the towns of Beit Hanoun, Beit Lahiya and the Jabaliya refugee camp.
The move targeted Palestinians who have been sending rockets into Jewish areas - more than 20 were fired in the last day, the BBC's Alan Johnston reports.
Heavy gunfire was used to stop crowds gathering, injuring six Palestinians, medical officials and witnesses say.
The latest rockets to hit Israel were fired on Wednesday morning. They landed in the Negev desert, causing no injuries, an army spokesman said.
Earlier, Palestinian militants fired mortars and rockets at the Israeli border town of Sderot. The Israeli tanks were seen moving into northern Gaza at just before dawn.
The operation is to "stop and prevent the firing of more rockets at Israeli towns", Reuters quoted the Israeli military source as saying.
However, our correspondent says Israel is finding it hard to counter Hamas' strategy of randomly rocketing civilian areas - a recent occupation of northern Gaza failed to stop the flurry of rockets.
Meanwhile, two Israeli soldiers were hurt during an operation to arrest a Hamas militant in the West Bank town of Hebron, the Israeli army said.
On Tuesday, Hamas vowed vengeance for 14 of its members who were killed in an overnight strike in Gaza City.
Marchers in Gaza mourned the Hamas militants on Tuesday
Tens of thousands of people thronged the streets of the city for the funerals of the militants.
Israel said it launched missiles on a Hamas training exercise being carried out around midnight at a sports ground in the east of the city.
Palestinian Prime Minister Ahmed Qurei denounced the attack, and said a Palestinian response would be justified.
Israel has itself vowed to take action against Hamas, after the group claimed responsibility for the 31 August suicide bombings of two buses in Beersheba, that killed 16 people.
But Prime Minister Ariel Sharon said the air strike on Hamas members was not in revenge for Beersheba, but rather "part of our continuous war against terrorism".