Much of the Gaza Strip was plunged into darkness after Israeli warplanes knocked out a power station and hit three bridges in a series of night time raids aimed at blocking movement across the territory by militants.

Flames poured into the night sky from the power plant and the sound of shelling and gunfire from combat helicopters could be heard as ground forces moved into southern Gaza where the missing serviceman was believed to be held.

"Our main objective is to bring this soldier home safe and sound," senior defence ministry official Amos Gilad told army radio, referring to the captive 19-year-old Gilad Shalit.

First offensive since withdrawal

It was the first major ground offensive against Gaza since Israel pulled settlers and troops from the impoverished coastal strip last year in a highly controversial operation that ended a 38-year occupation.

No casualties were reported in the incursion, which followed intensive mediation efforts to free Shalit after his abduction in an attack on Sunday that also killed two Israeli soldiers and two militants.

Israel massed thousands of troops on the Gaza border as Prime Minister Ehud Olmert ruled out any negotiation with the kidnappers, holding the Hamas-led government and Palestinian president Mahmud Abbas responsible.

The raids followed a landmark agreement on Tuesday between Palestinian factions on a political initiative that implicitly recognises Israel's right to exist, a historic policy shift by Hamas which has long advocated the destruction of the Jewish state.

Israel dismissed the deal however as an "internal matter".

Settler also abducted

The situation on the ground was further complicated when an armed Palestinian group claiming to hold the soldier also threatened to kill a Jewish settler it said it had abducted in the occupied West Bank.

"Unless the aggression stops, we will kill the settler," said a representative of the Popular Resistance Committees, which claimed Sunday's attack along with the armed wing of Hamas and another group.

Although there has been no official Israeli confirmation of the settler kidnapping, one couple reported their son missing after he failed to return home on Monday.

The Gaza incursion came amid international appeals for restraint over the kidnapping which has triggered the worst Middle East crisis since the militant Islamist movement Hamas took office in March.

It also presented the first major security challenge for Olmert since he took office in May pledging to unilaterally redraw the map of Israel even without negotiations with the Palestinians.

Pressure on Hamas from all sides

Egypt, France and the Vatican, as well as key Israeli ally the United States, sought to exert pressure on the Palestinians to hand over the soldier.

Israel said it concentrated its forces a few kilometres into southern Gaza where it believed Shalit was being held, including the area of Dahaniyeh near the destroyed airport.

"We have no immediate plans to go deeper in. That could change but that's the situation right now," an army spokesperson said.

At one point troops were attacked by light arms fire and possibly an anti-tank missile, but there were no reports of any casualties, he said.

Bracing for the onslaught, Palestinian militants had erected earthen mounds across roads and sealed off entrances to refugee camps in parts of Gaza, one of the most densely populated regions on earth.

Men, women and children packed into at least a dozen cars and a horse-drawn cart fled into Rafah from areas to the east as Israeli troops entered the territory while armed gunmen prowled the streets.

"All the people are leaving. They're heading west because we're afraid of the sweep, we're escaping the invasion," said Auda Adwan (20).

Armed groups have vowed not to release the soldier until all Palestinian women and children are freed from Israeli jails, a demand already rejected by Olmert.

"Israel is prepared for a long battle against Palestinian terror," Olmert told parliament on Tuesday. But he added: "Even in the difficult circumstances of recent days I declare that we will do everything in our power to hold negotiations with the Palestinians."

Sunday's attack, which saw gunmen tunnel their way into Israel in an assault that has raised questions over possible military and intelligence failings, was the deadliest in the area since Israel's pullout from Gaza.

Tensions have long been mounting however, with Israel and the West both financially and politically boycotting Hamas as a blacklisted terror group, plunging the territories into a deep crisis.

Israel said Hamas members — even ministers — were in its sights and levelled threats against its Damascus-based political supremo Khaled Meshaal, who famously survived a Mossad assassination bid in 1997.

Past history of soldiers kidnapped at the hands of Palestinians bodes ill for Shalit, with all nine such previous cases ending in death.

Meanwhile, Hamas and the rival Fatah movement announced a deal drawn up by Palestinian prisoners that implicitly recognises Israel's right to exist by calling for a Palestinian state on land conquered in 1967.

All factions excluding Islamic Jihad had approved the initiative which is due to go before Abbas and Hamas prime minister Ismail Haniya for signing.

Abbas, locked in a power struggle with Hamas, had vowed to put the statehood initiative to a referendum on July 26 should no agreement be reached, although Hamas had slammed the vote as an attempt to overthrow its government.

AFP