Israeli Prime Minister Ariel Sharon has ordered "unrestricted" military strikes against Palestinian militants after rocket attacks from Gaza.
Overnight Israeli aircraft launched a series of air raids, injuring several people, and arrested more than 200 suspected militants in the West Bank.
Israel has also taken the unprecedented step of posting artillery pieces on the border with Gaza, and practice-firing.
Palestinians warned the moves could force a ceasefire to collapse.
Amid threats of revenge attacks from militants, Palestinian negotiator Saeb Erekat called on US President George W Bush to step in to calm the conflict "so we can sustain the cessation of violence".
However, the US ambassador in Israel said: "We all know that the terrorists are trying to provoke Israel at a very sensitive time and we understand exactly what the government's position is and the response it has taken."
The EU and UN Secretary-General Kofi Annan urged restraint on both sides.
Mr Sharon told his cabinet that after dozens of rockets were fired into Israel from Gaza, there would be "no restrictions regarding the use of all means to strike at the terrorists".
"We don't intend here to stage a one-time action, but intend to carry out a continued action, whose aim is to hurt the terrorists and not to let up," he said.
The Palestinian parliament has said it will postpone a vote of no-confidence in the prime minister and his cabinet scheduled for Monday because of the surge in violence.
The deputy speaker of parliament said the travel restrictions imposed by Israel meant that many MPs would not be able to reach Ramallah.
The escalation of violence comes only a fortnight after Israel's military withdrawal from the Gaza Strip.
In the latest activity, Israeli forces launched air strikes early on Sunday against alleged weapon storage sites, and a school linked to the militant group Hamas. At least 19 people were reported injured in the strikes.
They are part of a cycle of violence over several days:
The Israeli army said those arrested in the West Bank included activists from both Hamas and Islamic Jihad.
- Friday: Israeli troops shoot dead three Islamic Jihad militants in Tulkarm, West Bank, in raids on those suspected of involvement in suicide attacks earlier this year
- Friday: Islamic Jihad responds with a rocket attack on Israel from Gaza
- Friday: An explosion at a Hamas rally in Gaza kills 15 people. Hamas blames Israel. Israel denies any involvement. The Palestinian Authority accuses Hamas of mishandling weapons at the rally
- Friday/ Saturday: militants fire up to 40 rockets from Gaza at the Israeli town of Sderot, injuring at least five people. Hamas calls them revenge for the rally blast
- Saturday: Israel launches a series of air raids in response, including one that kills two Hamas militants in a car in Gaza
- Saturday: Israeli troops and artillery gather on the border with northern Gaza. The borders with Gaza and the West Bank are sealed
- Saturday/ Sunday: Israel launches more overnight air strikes and arrests more than 200 Palestinians in West Bank
Hamas said Hassan Yousef, its leader in the West Bank, was among them.
Israel says Akram school, Gaza, raised funds for Hamas
With reports that the Israeli cabinet had also agreed to resume the targeted killings of militants, Hamas issued a warning that it would step up its own attacks.
"This escalation and return to a policy of assassinations and arrests and attacking innocent people's homes brings us back to Square One," said Mushir al-Masri, a Hamas spokesman in Gaza.
"All options are open, including striking inside the Zionist entity."
The BBC's Lucy Williamson in Jerusalem says the increased tension comes at a sensitive time for Israeli Prime Minister Ariel Sharon.
He faces a party leadership challenge, with his Likud party's central committee due to vote on Monday whether to back his rival and former prime minister, Benjamin Netanyahu.
Mr Netanyahu opposed Mr Sharon's decision to pull settlers out of Gaza, saying it would encourage Islamic militants to attack Israel.
He is seeking the Likud leadership, with national elections a little over a year away.
If Mr Sharon loses the vote, it is thought he might leave the party and set up a new centrist alliance that polls suggest would be popular with voters.