Israeli troops have detained eight Palestinian ministers and dozens of officials from the ruling Hamas group in raids across the West Bank.
Sixty-four MPs and officials were seized, amid Israeli efforts to secure freedom for a captured soldier in Gaza.
Israeli forces meanwhile massed at Gaza's northern border, as troops and tanks dug into positions in the south, a day after their original incursion.
Air strikes have damaged infrastructure in Gaza without causing casualties.
Much of Gaza has been left without electricity and running water after a power plant was hit, while several bridges were also destroyed, preventing travel between the north and south of the 45km Strip.
The Israeli army dropped leaflets in northern Gaza urging residents to avoid moving in the area because of impending military activity
Israel aircraft later attacked a car in Gaza City carrying militants from the Islamic Jihad group, Palestinian sources said.
The militants escaped, although one was lightly injured in the blast, witnesses said.
Separately, the body has been found of an Israeli settler who Palestinian militants abducted and killed at the weekend. The body of Eliyahu Asheri, 19, was found in a shallow grave near the city of Ramallah.
Another missing Israeli, who militants also claimed to have seized, was found dead, apparently from natural causes.
Hamas has condemned Israel's seizure of its officials.
Abu Ubaida, a spokesman for Hamas's armed wing, told Reuters news agency it was an attempt to blackmail the group to gain information about the captured soldier.
But an Israeli army spokeswoman told Reuters the detainees "are not bargaining chips for the return of the soldier".
"It was simply an operation against a terrorist organisation," she was quoted as saying.
The detained ministers include Finance Minister Omar Abdal Razeq, Social Affairs Minister Fakhri Torokma and Prisoners' Affairs Minister Wasfi Kabha and Deputy Prime Minister and Education Minister Nasser Shair.
The BBC's Alan Johnston in Gaza says Israel is dramatically stepping up pressure on the Hamas government to secure the soldier's release.
Cpl Gilad Shalit was seized by Palestinian militants in an attack on an Israeli border post on Sunday, that also left two Israeli soldiers and two militants dead.
Israeli forces pushed into southern Gaza on Tuesday night, taking up positions near the town of Rafah.
Air strikes continued throughout Wednesday, with missiles striking a road near Khan Younis refugee camp and a sports field of the Islamic University in Gaza City.
Nervous civilians in the north stockpiled batteries and candles, as well as food and water.
In southern Gaza, where the Rafah crossing with Egypt has been closed since Cpl Gilad's capture, militants blew a large hole in the border wall.
Palestinian security forces stopped people from pushing through the gap by forming a human cordon and a curfew was imposed.
Palestinian Authority President Mahmoud Abbas called the air strikes collective punishment.
Amnesty International, the human rights group, called for all hostages to be released and for "an end to the wanton destruction and collective punishment" by Israel.
Prime Minister Ismail Haniya, of Hamas, criticised Washington for giving approval to the Israeli incursion.
Mr Haniya said Washington had "given the green light to aggression" and called on the United Nations to step in to prevent an escalation in violence.
A spokesman for US President George W Bush said Israel had a right to defend itself and the lives of its citizens.
The spokesman said Hamas must shoulder the blame for the Israeli assault because militants linked to it had captured Cpl Shalit.
Mr Haniya urged the UN Security and Arab League to move to end the crisis.
"The Israeli occupation must put an end to its aggression before the situation gets complicated and the crisis gets worse," Mr Haniya said.
UN Secretary General Kofi Annan said he hoped for a swift diplomatic solution to the crisis in Gaza. He warned that the crisis risked inflaming tensions across the region.