Israel has continued its attacks against Palestinian militants, with a deadly air strike on a car in Gaza.
Israel vowed to wage a sustained campaign against militants
A top Islamic Jihad militant, Mohammed Khalil, and a fellow militant were killed, and two people were wounded in the attack outside Gaza City.
The Israeli Prime Minister, Ariel Sharon, has ordered "unrestricted" strikes against Palestinian militants, after rocket attacks from Gaza.
Palestinians have warned that the moves could force a ceasefire to collapse.
The Palestinian militant organisation, Hamas, said on Sunday it would end to its rocket attacks on Israel from the Gaza Strip.
The Hamas leader in Gaza, Mahmoud Zahar, said it was ending operations which it said had been in response to Israeli assaults, and confirmed its commitment to the ceasefire declared earlier this year.
Sunday's attack was another sign of the escalating violence in Gaza over the weekend, just a fortnight after Israeli troops withdrew from the Gaza Strip after 38 years.
Overnight on Saturday, Israeli forces launched air strikes against alleged weapon storage sites, and a school linked to the militant group Hamas. At least 19 people were reported injured in the strikes.
The Israeli army said it arrested more than 200 militants in West Bank, including activists from Hamas and Islamic Jihad. It also test-fired artillery rounds into northern Gaza.
These incidents are part of a cycle of violence over several days:
- 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 the West Bank.
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 Akram school in Gaza was flattened by an Israeli air strike
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.
Hamas has issued a warning that it will 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."
Both the Palestinian and the Israeli leaders are facing challenges to their leadership.
The Palestinian parliament was to hold a vote of no-confidence in the prime minister, Mahmoud Abbas, and his cabinet on Monday. But this has been postponed because of the upsurge in violence.
Mr Sharon also faces a party leadership challenge.
His Likud party's central committee is due to vote at a party conference 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.