Three people have been killed as rockets fired from Gaza struck southern Israel, amid escalating violence.
They died when a four-storey building in the town of Kiryat Malachi was hit.
It marks the first Israeli fatalities since Israel killed Hamas' military chief in Gaza on Wednesday.
Fifteen Palestinians, mainly militants but also children, have reportedly been killed in the continuing Israeli operation. About 200 rockets have been fired into Israel, the army says.
It says that 145 of them were destroyed by Israel's Iron Dome interceptor system.
Hundreds of rockets were fired into Israel by militants in Gaza, and Israel carried out numerous air strikes as cross-border violence soared in recent weeks.
British Foreign Secretary William Hague said that "Hamas bears principal responsibility for the current crisis", also urging all the sides involved to "avoid any action which risks civilian casualties or escalates the crisis".
Meanwhile, Egyptian President Mohammad Mursi condemned the air strikes, after recalling his ambassador from Israel. Dozens of anti-Israeli protesters held a rally in the capital Egypt.
Hamas' political leader Khaled Meshaal vowed to continue the "resistance" against Israel, Reuters news agency reported.
In a separate development, Palestinian Authority President Mahmoud Abbas reportedly cut short a trip to Switzerland and was returning to his base in the West Bank to deal with the growing crisis.
'Gates of hell'
The three Israelis - two women and a man - died when a rocket hit the top floor of the building in Kiryat Malachi, about 25km (15 miles) north of Gaza.
Three other people - a four-year-old boy and two babies - were injured, Israel's foreign ministry said.
The building's residents were warned by sirens about the impending attack, but did not have enough time to escape, reports said.
Speaking to the BBC after the attack, local resident Yerumichael Simon said: "I live across the street and I used to live inside that building. We grew up together."
"It's very hard for me to think about what happened. At 08:00 in the morning we heard the alarm and a big boom. When I went outside I saw the big hole".
The BBC's Yolande Knell, who is at the scene of the rocket strike in Kiryat Malachi, says sirens continue to wail at regular intervals across southern towns, sending residents rushing for cover.
She says usually when rockets fired from Gaza are heading for a populated area interceptor missiles fired by Israel's Iron Dome batteries can be seen, with loud booms heard overhead and vapour trails visible cross-crossing the sky.
But she adds that some rockets still get through and the one that hit the building left a gaping hole on the top floor where two Israeli families were living.
Meanwhile, seven Palestinians - two children and five militants - were killed in Israeli air strikes on Thursday, Hamas said. There were no immediate details about the exact locations of the strikes.
The BBC's Jon Donnison in Gaza City says vapour trails from rockets being fired by Palestinian militants can be seen, and intermittently large mushrooms of smoke from Israeli air strikes appear.
Reports in Israel's media say that a rocket hit a house in Ashdod without causing injuries and another rocket landed close to a school in Beer Tuvya. There were also reports of rockets landing in Ofakim and Ashkelon.
Hamas on Thursday said it had fired missiles at Tel Aviv - but the claim was denied as "psychological propaganda" by the Israel Defence Forces.
So far the violence does not appear on the same scale as the last Gaza war almost four years ago when hundreds of Palestinians were killed on the first day of Israel's operation, our correspondent adds. Thirteen Israelis also died in that conflict.
Israeli Prime Minister Benjamin Netanyahu has warned that his country is prepared to extend its operation against Hamas.
But in a televised statement, he said Israel would continue to do "everything in its power" to avoid civilian casualties.
He accused Hamas of the "double war crime" of firing at Israeli civilians and then hiding behind Palestinian civilians, saying the militants deliberately placed their rockets and missiles in civilian areas.
"There is no moral symmetry between Israel and the terrorists in Gaza... Hamas deliberately targets children and they deliberately place their rockets next to their children," said Mr Netanyahu.
He added that Israel would take whatever action was necessary to defend itself.
Israeli defence ministry spokesman Joshua Hantman told the BBC that about one million Israelis across the country were now in the range of fire from militants.
He added that a ground offensive was "an option if we need to".
Meanwhile, Israeli Transport Minister Israel Katz told the BBC that "if the shooting doesn't stop, Israel will also target [Hamas leader] Ismail Haniyeh".
Responding to Wednesday's strike, Hamas warned that the killing of 52-year-old Ahmed Said Khalil al-Jabari would "open the gates of hell" for Israel.
Israel said Jabari, the head of Hamas' military wing, had been responsible for all attacks from Gaza in the past decade.
In Gaza City, large crowds gathered for his funeral, vowing revenge attacks.
Among others killed in Israeli air strikes in the last two days was the 11-month-old son of a BBC Arabic Service picture editor in Gaza City. The child, Omar, died from severe burns in hospital. His brother and uncle were critically injured.
An emergency closed session of the UN Security Council was held at the request of Egypt late on Wednesday to discuss the situation.
The Palestinian envoy to the UN, Riyad Mansour, told the meeting that Israel was "vulgarly and publicly boasting about its wilful killing of Palestinians".
US Ambassador to the UN Susan Rice defended Israel's actions.
"There is no justification for the violence that Hamas and other terrorist organisations are employing against the people of Israel," Mrs Rice told the session.
In other diplomatic reaction:
- US President Barack Obama spoke to Mr Netanyahu by telephone on Wednesday evening, with both men agreeing that Hamas needed to halt its attacks on Israel to allow the situation to de-escalate, the White House said
- UK Foreign Secretary William Hague said he was "gravely concerned by the situation in Gaza and southern Israel", urging all the sides involved to "avoid any action which risks civilian casualties or escalates the crisis"
- UN Secretary General Ban Ki-moon spoke to Mr Netanyahu and Egyptian President Mohammed Mursi, expressing concern at the "deteriorating situation"
- Arab League foreign ministers say they will meet in emergency session on Friday to discuss the escalating violence
- Egyptian President Mursi also spoke to President Obama and agreed on the importance of working to calm the situation as quickly as possible, the White House said.
Neighbouring Egypt condemned the strikes, recalled its ambassador to Israel and summoned the Israeli ambassador in Cairo. It also called for UN and Arab League meetings.
The BBC's Kevin Connolly, in Cairo, says Egypt's reaction to events in Gaza will be followed closely.
UPDATE (12 March 2013): A draft report by the UN Office of the High Commissioner for Human Rights said that Omar Mashhrawi, the 11-month-old son of a BBC journalist in Gaza, may have been killed by a Palestinian rocket, not an Israeli one.