Several people were injured when an Israeli missile struck a car carrying Hamas militants in Gaza, Palestinian hospital and security sources say.
The militants managed to escape the wreckage, reports say
Hours earlier, Palestinian militants fired rockets at the Israeli town of Sderot, injuring three Israelis.
The ongoing violence comes a day after the Israelis aborted a planned air attack on the Gaza home of a militant when people formed a shield around it.
People were determined to continue to protect the house, a Hamas leader said.
Meanwhile, Israel's cabinet has met to discuss a response to continuing Palestinian rocket attacks.
Israeli Prime Minister Ehud Olmert criticised a UN resolution passed on Friday that calls on UN Secretary General Kofi Annan to investigate the Israeli shelling of Beit Hanoun last month, which resulted in the deaths of 19 Palestinians.
Ehud Olmert had strong words in response to the UN's call
"I have no doubt that it is not the state of Israel that should be answering questions about the harming of civilians, especially after we voiced deep regret at the harm done," Mr Olmert said.
He blamed Palestinian gunmen and rocket crews for the violence in Gaza saying they were "striking civilians as a methodical and consistent policy. Only those who preach morality and roll their eyes find it fit to condemn [Israel]."
The Israeli army said Sunday's air strike had targeted a vehicle carrying several senior members of the Hamas rocket-launching unit but gave no further details, the Associated Press reported.
Witnesses said a car was hit as it travelled through the Zeitoun neighbourhood of Gaza City.
The Hamas militants inside managed to escape the wreckage.
The exact number of injured and their condition was not clear. Medical workers said the wounded included passengers and passers-by, among them teenagers and children.
Meanwhile, Palestinians were celebrating what they called a victory after the Israeli military called off a planned strike on the home of Mohammedweil Baroud, a commander in the Popular Resistance Committees militant group.
Mr Baroud said he was warned by Israeli forces to leave his home in the Jabaliya refugee camp. He instead ran to a mosque and summoned neighbours to help defend the house.
The Israeli army often orders people out of homes ahead of attacks, saying it aims to avoid casualties.
An Israeli military spokesman confirmed to Reuters news agency that the raid had been called off because of the Palestinian action.
Palestinians say they will continue to shield the targeted house
He said Israel would continue its policy of targeted air strikes and accused militants of using civilians as human shields.
"The attack plan was cancelled because of the people there," he said. "We differentiate between innocent people and terrorists."
A Hamas leader in northern Gaza, Nizar Riyan, who was part of the human shield, told the BBC people were determined to continue protecting the house.
"Now, men and women are taking it in turns. Women came in the morning and said to us they will be here during the day, and you men will be here during the night," he said.
"Our sisters are now sitting on the roof. They told us to have some rest inside the house. This is a great stance by our people, women and men, and will break the power of F-16 planes."