Israel says its forces have withdrawn from Rafah refugee camp in Gaza in what it says is a pause in operations.
Rafah residents tell of a trail of destruction
Six day old Operation Rainbow has targeted militants and tunnels used to smuggle arms from Egypt, Israel says.
Israeli military officials say seven Palestinian civilians died in the operation, though other sources put the figure much higher.
The United Nations says more than 1,000 Palestinians have been made homeless by home demolitions.
A senior Israeli officer described Monday's pullout as a pause, saying his forces were taking "a deep breath".
Israeli security officials told a BBC correspondent in Tel Aviv that 40 Palestinian militants had been killed in the operation, and that it would continue after the present pause.
The Israeli army says it has closed three tunnels and destroyed or badly damaged 46 structures used by militants.
However the UN relief agency for Palestinian refugees says Israeli forces destroyed 180 homes, leaving more than 1,000 people homeless.
A senior military official told Reuters news agency: "I don't know if I can say Operation Rainbow is over. We are taking a deep breath and this goes on."
Rafah residents said the Israeli withdrawal had left behind a trail of destruction.
"It looks like an earthquake hit," Rafah resident Sami Fuja told Reuters news agency
Earlier on Monday tanks and troops pulled out of the Tel Sultan district of Rafah - the scene of intense clashes in recent days.
Residents restocked food and begged for water as municipal workers rushed in to repair extensive damage to pipes and power lines.
During a funeral procession for 16 people killed in the area mourners chanted for revenge and gunmen fired volleys into the air.
The Israeli army officer in charge of Gaza, Major-General Dan Harel, said 40 Palestinian militants had been killed during Operation Rainbow.
He expressed regret at the civilian casualties - which he put at seven - and said the army was waging war on terrorists, not ordinary people.
Israel has faced growing criticism, both internationally and at home, for its actions in Rafah.
The BBC's Richard Miron in Jerusalem says General Harel's statement appears to be part of the army's effort to address the criticism, while continuing with its objectives in Gaza.
The Israeli official said the army's operations along the border between Gaza and Egypt would persist - even in the wake of a pull-out of Jewish settlements from Gaza, as proposed by Prime Minister Ariel Sharon.
Mr Sharon has said he will present an amended plan to withdraw from Gaza to his government on Sunday.
Israel has made clear it will continue to pursue Gaza militants
The new plan reportedly calls for a phased military pullout from Gaza as well as the evacuation of 21 settlements and a few in the northern West Bank.
He met Egyptian intelligence chief Omar Suleiman for talks on the plan on Monday. Mr Suleiman later went to Ramallah to meet Palestinian leader Yasser Arafat.
Reports from Jerusalem said he was carrying a warning from Mr Sharon to Mr Arafat not to sabotage an Israeli pullback in Gaza.
The Rafah operation followed the killing of 13 Israeli soldiers in various ambushes in the area.