Israeli warplanes killed 13 Palestinians, as more than 90 targets in the Gaza Strip were pounded from sea and air in a new campaign to stamp out Hamas rocket fire.
The most serious flare-up over Gaza since November 2012 comes as Israel struggles to contain a wave of violence in Arab towns over the grisly murder of a Palestinian teenager by Jewish extremists.
With the two sides sliding towards another major conflict, Israel called up more reservists for a possible major ground operation.
Palestinian president Mahmoud Abbas demanded that Israel "immediately stop" its air campaign, dubbed Operation Protective Edge, and asked the world to pressure Prime Minister Benjamin Netanyahu's government. But Netanyahu was expected to order a "significant broadening" of the operation and instruct the army to "take off the gloves", a source said.
In the worst strike, a missile slammed into a house in the southern city of Khan Yunis after people had reportedly formed a human shield to protect it, killing seven people.
Witnesses said an Israeli drone fired a warning flare, prompting relatives and neighbours to gather at the house as a human shield. Soon after, an F-16 warplane fired a missile that levelled the building.
In response, Hamas said "all Israelis" would be potential targets for retaliation. "The Khan Yunis massacre... of children is a horrendous war crime, and all Israelis have now become legitimate targets for the resistance," spokesman Sami Abu Zuhri said.
In central Gaza, two people was killed in an air strike west of Nusseirat refugee camp, Palestinian medics said.
Soon after, four men were killed when a missile slammed into a car in the centre of Gaza City, the emergency services said.
Earlier, the Israeli military said nearly 300 rockets and mortars had been fired at the country in recent weeks, including a barrage of about 80 on Monday alone. So far, no Israelis have been killed. Israel responded with dozens of air strikes and signalled it would not launch a larger offensive if Hamas stopped its rocket fire.
But military spokesman General Moti Almoz confirmed Israel was now preparing for a possible ground offensive.
"All options are on the table. All these steps are being considered. Two brigades, which are currently stationed around the Gaza Strip, are prepared and ready and in the coming days, more will arrive," he said.
The cabinet has authorised the military to call up 40,000 reservists for a possible assault, Israeli media reported.
Among the sites the army said it targeted early yesterday were four houses it said were "activity sites" belonging to Hamas militants involved in launching rockets at Israel or other militant activity. There were no reported casualties in the strikes. Another military spokesman, Lieutenant Colonel Peter Lerner, said Hamas had amassed about 10,000 rockets, including longer-range rockets that can reach "up to Tel Aviv and beyond".
The army ordered hundreds of thousands of Israelis within a 40km radius of the Gaza Strip, including Israelis in the major southern city of Beersheva, to stay indoors and near shelters, Lerner said. Kindergartens and summer camps in the area were cancelled.
Lerner said last month's kidnap and killing of three Israeli teenagers in the West Bank was connected to the intensified rocket fire carried out by Hamas militants in Gaza.
Israel blames Hamas for the teens' abduction and is conducting a manhunt for two Hamasaffiliated Palestinians in the West Bank it believes carried out the kidnapping and killing.
Agence France-Presse, Associated Press, Bloomberg