Israel has battered Gaza a day after suffering its bloodiest attack in decades when Hamas fighters rampaged through Israeli towns, killing hundreds and abducting an unknown number of others, threatening a major new war in the Middle East.
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In a sign the conflict could spread beyond Gaza, Israel and Lebanon's Iran-backed Hezbollah militia exchanged artillery and rocket fire, while in Alexandria, two Israeli tourists were shot dead along with their Egyptian guide.
Overnight, Israeli air strikes had hit housing blocks, tunnels, a mosque and homes of Hamas officials in Gaza, killing more than 300 people, including 20 children, as Prime Minister Benjamin Netanyahu vowed "mighty vengeance for this wicked day".
In southern Israel, Hamas gunmen were still fighting Israeli security forces 24 hours after a surprise, multi-pronged assault during a rocket barrage smashed through security barriers and army bases to send hundreds of fighters into nearby towns.
Israel's military, which faces questions over its failure to prevent the attack, said it had regained control of most infiltration points, killed hundreds of attackers and taken dozens more prisoner but was still fighting in some places.
It said it had deployed tens of thousands of soldiers in the area surrounding Gaza, a narrow strip that is home to 2.3 million Palestinians, and planned to evacuate all Israelis living around the frontier of the territory.
"We're going to be attacking Hamas severely and this is going to be a long, long haul," a military spokesman told a briefing with reporters.
The attack represented the biggest and deadliest incursion into Israel since Egypt and Syria launched a sudden assault in an effort to reclaim lost territory in the Yom Kippur war 50 years ago.
The conflict could undermine US.-backed moves towards normalising relations between Israel and Saudi Arabia - a security realignment that could threaten Palestinian hopes of self-determination and hem in Hamas' main backer, Iran.
Tehran's other main regional ally, Lebanon's Hezbollah, fought a war with Israel in 2006 and tensions have regularly flared since.
"We recommend Hezbollah not to come into this and I don't think they will," Israel's army spokesperson said.
The debris from Saturday's attack still lay around southern Israeli towns and border communities on Sunday morning and Israelis were reeling from the sight of bloodied bodies lying on suburban streets, in cars and in their homes.
Gunmen killed more than 400 Israelis in the raid, according to Israeli TV reports, including senior military officers, as terrified Israelis, barricaded into safe rooms, recounted their plight by phone on live television.
Fighters escaped back into Gaza with dozens of hostages, including both soldiers and civilians.
The capture of so many Israelis, some filmed being pulled through security checkpoints or driven, bleeding, into Gaza, adds another layer of complication for Netanyahu after previous episodes when hostages were exchanged for many prisoners.
Israeli air strikes on Gaza began soon after the Hamas attack and continued overnight and into Sunday.
Palestinian health officials said 313 people had been killed in Gaza and almost 2000 wounded in the retaliatory strikes.
The escalation comes against a backdrop of surging violence between Israel and Palestinian militants in the Israeli-occupied West Bank, where a Palestinian Authority exercises limited self-rule, opposed by Hamas that wants Israel destroyed.
Peacemaking has been stalled for years and Israeli politics have been convulsed this year by internal wrangles over Netanyahu's plans to overhaul the judiciary.
Hamas leader Ismail Haniyeh said the assault that began in Gaza would spread to the West Bank and Jerusalem.
Gazans have lived under an Israeli blockade for 16 years, since Hamas seized control of the territory in 2007.
In a speech, Haniyeh highlighted what he called threats to Jerusalem's Al-Aqsa Mosque, on a site that is also holy to Jews who know it as the Temple Mount, the continuation of Israel's blockade and Israeli normalisation with countries in the region.
"How many times have we warned you that the Palestinian people have been living in refugee camps for 75 years, and you refuse to recognise the rights of our people?"
In the north, Lebanon's Hezbollah said in a statement it had carried out a rocket and artillery attack on three posts including a "radar site" in the Shebaa Farms, a slice of land occupied by Israel since 1967 that Lebanon claims.
Australian Associated Press
