Three Palestinian family members, including a six-year-old girl, were killed on Sunday in an air strike in Gaza City as Israel rejected a call by Hamas premier Ismail Haniya for a mutual ceasefire.
The girl, her elder brother and her mother were killed in the air raid which according to an army spokesman targeted a group of militants east of Gaza City.
Despite initial denials, the Israeli army later confirmed carrying out an airstrike in the neighbourhood of Sejayun.
"We are currently examining the exact details of the strike," an army source said.
Four more Palestinians were killed earlier as Israeli forces shifted the focus of their Gaza campaign to end militant rocket fire and free a captured soldier to the seaside strip's eastern frontier.
As Israel pushed on into Gaza, officials brushed aside Haniya's call for a "return to a situation of calm on the basis of a halt to all military operations by both sides".
"We do not hold negotiations with terrorists. They must first return the kidnapped soldier unharmed and cease their fire," an official in Prime Minister Ehud Olmert's office told reporters.
"We will decide on our next moves according to the steps taken by the Palestinian government," he said, asking not to be named.
Haniya stressed that his Hamas government was determined to solve the problem through diplomatic channels in a "peaceful" manner.