Israel pounded nearly 30 targets in Gaza overnight after militants fired scores of rockets into the south, prompting Palestinian leader Mahmud Abbas to demand Thursday that it halt its "escalation."
The rocket barrage, which was the heaviest since an eight-day conflict between Israel and Gaza's Hamas rulers in November 2012, sent thousands of Israelis fleeing for cover across the south on Wednesday afternoon.
So far, there have been no reports of casualties on either side of the border.
And experts said Israel was not interested in a major confrontation with Gaza's Hamas rulers.
The latest tit-for-tat violence was sparked by an incident on Tuesday when militants of the hardline Islamic Jihad group fired a mortar round at troops allegedly trying to enter southern Gaza, prompting an Israeli air strike which killed three of them.
In retaliation, Islamic Jihad's armed wing, the Quds Brigades, fired scores of rockets over the border on Wednesday, with the group putting the number at 130.
Israel responded with air strikes on 29 targets across Gaza, hitting bases used by Hamas as well as those of Islamic Jihad, which has so far claimed all of the rocket fire.
Security sources in Gaza said there were no casualties in the air strikes as all the sites had been evacuated.
The army said more than 60 rockets had struck southern Israel on Wednesday, five of them hitting populated areas. Another three were intercepted by the Iron Dome air defence system.
Another three rockets struck southern Israel on Thursday morning. The army said one crashed into an open area near the border, while the other two struck between the port cities of Ashdod and Ashkelon.
"Two rockets were fired, one north of Ashkelon, the second south of Ashdod, landing in open areas," police spokesman Micky Rosenfeld said.
Defence Minister Moshe Yaalon blamed both Islamic Jihad and Hamas for the escalation and said anyone firing at Israel would be responsible for his own fate.
"Hamas is responsible for the strip and if it does not know how to prevent fire on Israel from its territory, we will act against it and all of its broader interests," he said.
"Anyone involved in firing on Israel will be taking his life in his own hands."
- No rocket condemnation -
The air strikes, which began at around 2030 GMT on Wednesday, prompted a sharp rebuke from Abbas, who demanded Israel "put an end to its military escalation in the besieged Gaza Strip," his spokesman Nabil Abu Rudeina said.
Israeli Prime Minister Benjamin Netanyahu hit back during a tour with visiting British Prime Minister David Cameron.
"As the Teva (pharmaceutical) factory in Ashdod is manufacturing medications to be sent to Gaza, over there they are firing rockets at innocent Israelis," he told the British leader.
"How is it possible that he doesn't condemn the firing of rockets at innocent civilians? But he did condemn Israel for responding and firing at three terrorists who fired a mortar shell at them," he said, referring to Tuesday's border incident.
Cameron, who was to meet Abbas in Bethlehem later on Thursday, said: "I join you in condemning unreservedly the rocket attacks from Gaza."
Netanyahu, who has said Israel will act "with great force" against anyone attacking it, was to convene a special session of his security cabinet in Tel Aviv later, army radio said.
Foreign Minister Avigdor Lieberman said on Wednesday that Israel would have no choice but to reoccupy Gaza, from which it withdrew all troops and settlers in summer 2005.
But experts said Israel was not seeking a major confrontation in the territory.
"Israel has no intention of entering a major operation now," said Yaakov Amidror, who served as national security adviser until November.
"But if there's a continued response from the other side, the IDF will have to reconsider," he told army radio, adding that re-entering Gaza was "an option" but not one that Israel would rush into.
"It depends on the other side's decisions. Hamas is not joining in at this stage and that's a good thing."
Washington denounced the rocket fire as "reprehensible" and called for an immediate halt to such "terrorist attacks."