Israeli troops and Palestinian gunmen have clashed in a new area of the Gaza Strip, as part of an incursion sparked by the capture of an Israeli soldier.
Israeli troops launched operations after Cpl Shalit's capture
Three Palestinians were killed in the fighting near the main commercial crossing at Karni, East of Gaza City.
The clash came as the Israeli Army said it had withdrawn forces that entered Gaza from the north two days ago.
Israel began operations after Cpl Gilad Shalit was seized in a border raid two weeks ago.
The latest Israeli operation, involving tanks and helicopter gunships, took place close to a stronghold of the Palestinian militant organisation Hamas, near the Karni crossing.
Troops entered Gaza City via the eastern Shejaya neighbourhood.
However Israeli military sources say this is a limited operation, and that the troops will withdraw when it is complete.
The sources gave no details, but the BBC's Alan Johnston in Gaza says the raid could be linked to Israeli concerns that militants may be trying to tunnel under the border in this area.
Meanwhile Israeli forces say they have withdrawn from the nearby area of Beit Lahiya and three former settlements along the coast.
About 30 Palestinians have been killed in the past few days.
Earlier, Hamas confirmed for the first time that Cpl Shalit, 19, was alive and was being treated well and humanely.
A Hamas statement appeared to soften its demands for the release of Cpl Shalit, calling only for Israel to free Palestinian women and children held in its jails.
There was no mention of a previous demand that an additional 1,000 prisoners also be freed, including prominent militant leaders.
Israel on Friday sent conflicting signals about possible prisoner releases.
A spokesman quoted Interior Minister Avi Dichter as saying that Israel "knows how to carry out a release of prisoners as a goodwill gesture".
Cpl Shalit is alive and being well treated, says Hamas
But Interior Minister Roni Bar-On later said on television: "I have just spoken to Prime Minister Ehud Olmert and our position remains unchanged: we refuse to negotiate with Hamas and [Palestinian] prisoners will not be released."
The European Union accused Israel of using "disproportionate" force and of making a humanitarian crisis worse during operations in Gaza.
UN Secretary General Kofi Annan appealed to both sides "to pull back from the brink for the sake of all civilians in the region".
Palestinian President Mahmoud Abbas called both for militants to release Cpl Shalit and for Israel to free Palestinian prisoners.
"The world must stop this aggression and this inhumane invasion so that our [mediation] efforts can get somewhere," he said.
Israel's incursion into Gaza is its biggest military operation there since it ended its 38-year occupation nine months ago.