The blast wounded another 50 people, 15 children among them, and leveled a house and damaged at least 10 others.

Hamas had initially blamed Israeli armed forces for the house blast and militants fired dozens of rockets and mortar rounds at Israel in the hours following the explosion.

Israeli forces responded by targeting militants, with medics saying three Hamas fighters were killed in an air raid. Three more militants were killed by Israeli forces earlier Thursday.

In a statement Friday the Islamist movement's armed wing said, "Members of the Ezzedine al-Qassam Brigades were trying to prepare for a jihad operation" when six members of the brigades were killed in the blast in Beit Lahya.

A local leader of the Hamas armed wing died of his wounds on Friday, one day after his four-month-old baby died in the explosion, a doctor at Shiffa hospital in Gaza City said.

Despite preparations for further conflict, both sides on Thursday outlined their conditions for a truce with each other.

The Hamas leader, Ismail Haniya, speaking from Gaza said that any truce must include, "a lifting of the [Israeli] siege, with a precise timetable for opening the crossing points [out of Gaza] and a list of the categories of products that will enter the Gaza Strip."

"It is important that the Rafah terminal [between Gaza and Egypt] be part of the project for calm. The Israelis and others have insisted that the Rafah terminal not be included" in an eventual deal, he added.

This is the first time Hamas has demanded a timetable for opening the crossings and a list of products since Israel imposed the blockade after the Islamist movement seized control of Gaza from forces loyal to Abbas last June.

The Israelis have been linking the opening of Rafah – the only outlet for Gaza that does not pass through Israel – to the freeing of Corporal Gilad Shalit, captured by Hamas and others in a cross-border raid two years ago.

Haniya added that the Rafah crossing should be under the joint administration of the Palestinians and the Egyptians.

Israel's own conditions were laid out in Cairo by a top Israeli defense ministry official. Among Israeli conditions, he told AFP, the Jewish state insists that not only Hamas but also the other militant groups in the Palestinian territory halt their rocket and mortar attacks.

Another key condition is that progress be made toward the release of Shalit.

Israel also wants the Egyptian authorities to be more energetic in their efforts to halt weapons smuggling into Gaza.

Amos Gilad, a top aide to Defense Minister Ehud Barak, presented the conditions during talks in the Egyptian capital on Thursday with Egyptian intelligence chief Omar Suleiman who is mediating the negotiations with Hamas.

Egyptian mediators said they would have a response from Hamas by the middle of next week, the defense official said.

While Egypt has tried for months to get both sides to halt their fire in and around Gaza, the impoverished Palestinian enclave has remained rocked by violence.

Israel's top security cabinet convened on Wednesday and decided after a marathon five-hour meeting to give Egyptian mediation efforts a chance. But it also told the military to prepare for a major offensive into the densely populated territory at short notice.

Meanwhile on Friday Israel announced another settlement project in occupied Arab East Jerusalem, enraging Palestinians just ahead of a visit by U.S. Secretary of State Condoleezza Rice aimed at rescuing the stalemated peace process.

The Jerusalem municipality confirmed a report in the Ha'aretz newspaper that the green light had been given for 1,300 new homes for Jewish settlers in the occupied and annexed east of the city.

The houses will be built in Ramat Shlomo in the northern part of the Holy City where there are already 2,000 settler homes, Ha'aretz reported.

Ha'aretz called it one of the most ambitious expansion plans for settler homes in East Jerusalem, which was captured by Israel in the 1967 Arab-Israeli war and later annexed in a move not recognized by the international community.

Palestinian negotiator Saeb Erekat expressed outrage at the decision.

"We firmly condemn this project which reveals the Israeli government's intention to destroy peace," Erekat told AFP.

Rice is due in Israel late on Saturday for a two-day trip aimed at injecting momentum into the moribund peace process revived to great fanfare in the United States last November.

In a graphic illustration of the sensitivity of the issue, the BBC has broadcast video footage of what Israeli human rights organization B'Tselem says was an attack by masked Jewish settlers on a Palestinian shepherd.

The footage shows men brandishing baseball bats who are alleged to have beaten the elderly shepherd and his wife outside the occupied West Bank town of Hebron.