The Palestinians buried a general (left) as Israel laid its students to rest (right)
Following the killing of five Israeli students by a Palestinian gunman, Israeli forces launched military operations across the territories.
At least 39 Palestinians were reported dead, with Palestinian leader Yasser Arafat putting the toll as high as 58.
But as the violence raged, Israeli Prime Minister Ariel Sharon announced that he was ready to discuss a lasting truce with the Palestinians even if hostilities continued.
"Negotiations to stop the shooting will be held under fire," he said on Israeli TV.
Previously, Mr Sharon had insisted on a period of calm before entering any negotiations.
The fighting erupted just after US President George Bush announced he was sending his peace envoy Anthony Zinni back to the region.
Mr Arafat said that in addition to 58 dead many people had been wounded, Palestinian radio reported.
He accused Mr Sharon and his government of seeking to destroy the peace process.
Heavy losses
The fighting began with a night attack on the students at Atzmona settlement in the Gaza Strip and Israeli helicopters were still striking Palestinians targets by the end of the day.
Among the Palestinian dead was Major General Ahmed Mefraj, the deputy commander in Gaza and most senior Palestinian to be killed since the start of the intifada.
He and at least 16 other Palestinians died fighting Israeli troops on a search mission in the Gaza village of Khozza.
Fighting was no less fierce in the West Bank where 20 Palestinians were killed, Mr Arafat's radio station reported. An Israeli soldier also died in the violence.
Throughout the day, Israeli helicopter gunships were on the attack with attacks on Hebron in the West Bank and the Jabalya refugee camp in the Gaza Strip reported after dark.
Shock attack
Israel has been in shock at the attack on the heavily guarded Jewish settlement of Atzmona in the Gaza Strip.
A Hamas gunman kept up a grenade and gun attack for 20 minutes before being shot dead by Israeli soldiers.
The Israeli army commander in Gaza, Brigadier General Israel Ziv, said Israel was dealing with "people without any morals, any values - a cruel enemy".
On Friday afternoon, Israeli police shot dead a suspected would-be suicide bomber in northern Jerusalem.
Correspondents say the rising death toll and the increasing force of Israeli military action and rhetoric have stung Washington into action.
President Bush called on Mr Arafat to try harder to stop attacks on Israelis and he appealed to Israeli Prime Minister Ariel Sharon to do everything he could to make Mr Zinni's efforts a success.
US Vice President Dick Cheney will also begin a tour of the region on Sunday.