Israeli helicopter gun-ships fired rockets into the densely-populated Gaza City early on Monday in a swift response to a daring attack on an army post that left five soldiers and two Palestinian militants dead.
The Israeli military said two buildings in the east of the city which were targeted in the raid were used by the hardline Hamas organization to manufacture mortar shells and explosives used in attacks against soldiers and civilians.
Hamas was one of two Palestinian factions that claimed responsibility for the attack on the army post on the border between the Gaza Strip and Egypt on Sunday, in the deadliest offensive by militant groups since the death of the late Palestinian leader Yasser Arafat on November 11.
The army confirmed that five soldiers had been killed and another five wounded, two of them seriously, in the attack at Rafah.
"Initial inquiries indicate that a tunnel filled with explosives was exploded under an IDF [Israeli Defense Force] post in charge of securing the Palestinians crossing from the Gaza Strip into Egyptian Rafah," a spokesman for the military said.
"Immediately following the explosion, two Palestinian gunmen stormed into the IDF post and opened fire at the soldiers; the soldiers returned fire and two gunmen were killed."
The armed wing of Hamas and the Fatah Hawks, an armed offshoot of the mainstream Fatah organization, said in a joint statement that their fighters had packed 1.5 tons of explosives into the tunnel during a "suicide mission".
The attack has dented optimism that Arafat's death might lead to progress in the moribund Middle East peace process.
With the emergence of a more moderate leadership, Israeli Prime Minister Ariel Sharon had been indicating that he would coordinate his plan to pull troops and settlers out of Gaza next year with the Palestinian authorities.
But deputy defense minister Zeev Boim said on Monday that no progress would be made until the militant groups were brought to heel.
"Stopping terror is a pre-condition for any progress," Boim told military radio.
A spokesman for Sharon also said that the chances of the Israeli government working with the Palestinians over the exit from Gaza were undermined by such attacks.
"This attack will not prevent Israel from implementing its disengagement plan but this disengagement cannot be coordinated with the Palestinian Authority unless they act against the terrorist organizations," Raanan Gissin said.

© 2004 Agence France-Presse