Israeli troops and Palestinian gunmen fought fierce night-time clashes around the Gaza Strip early on Tuesday, as a war on Hamas that had killed more than 900 Palestinians entered its 18th day.
Hamas's armed wing, the Ezzedine al-Qassam Brigades, told AFP its forces had destroyed two Israeli tanks in the Gaza City neighbourhood of Zeitun, using rocket-propelled grenades (RPGs).
They also said a number of soldiers were killed in the village of Khuzaa, east of Khan Yunis near the Israeli border. But an army spokesman denied any tanks had been knocked out and said there was no report of Israeli casualties.
Medics said one Palestinian was killed by tankfire in Zeitun. It was not clear whether the victim was a fighter or civilian.
As the world awaited a threatened intensification of the offensive by Israel, the defiant leader of Hamas in the Gaza Strip vowed that the Islamists would emerge victorious.
Ismail Haniya made a rare televised address on Monday only hours after Israeli Prime Minister Ehud Olmert threatened to hit Hamas with an "iron fist" if it did not end the rocket attacks which the war aims to halt.
"We are approaching victory," said Haniya, head of the Hamas government in Gaza, which the Islamists seized from forces loyal to moderate Palestinian president Mahmud Abbas 18 months ago.
"I tell you that after 17 days of this foolish war, Gaza has not been broken and Gaza will not fall," he added, speaking from an undisclosed location.
Haniya also said the "blood of children" who have been killed in the conflict would serve as a "curse which will come back to haunt" US President George W Bush.
Bush has consistently blamed Hamas for the conflict, saying that while he wanted to see a "sustainable ceasefire," it was up to Hamas to choose to end its rocket fire.
Israel and Hamas both ignored a UN resolution -- on which the United States abstained -- which called last week for a truce.
The focus of peace efforts is now on an Egyptian proposal for an immediate ceasefire to allow humanitarian aid into Gaza, talks on opening Gaza's border crossings and taking steps to prevent arms smuggling.
Olmert said Israel's key demands were non-negotiable.
"We want to end the operation when the two conditions we have demanded are met: ending the rocket fire and stopping Hamas's rearmament. If these two conditions are met, we will end our operation in Gaza," he said.
"Anything else will meet the iron fist of the Israeli people, who are no longer ready to tolerate the Qassams (rockets)."
An army spokesman said nearly 30 missiles had been launched from Gaza on Monday, but no casualties were reported.
Residents said Israeli tanks already on Monday punched their way to the southern rim of Gaza City, advancing several hundred metres (yards) into the neighbourhoods of Ash Sheikh Ajlin, Tuffah and Zeitun.
"We are tightening the encirclement of the city," the offensive's commander, Brigadier Eyal Eisenberg, told reporters. "We are not static. We are careful to be constantly on the move."
In the hours after midnight, witnesses said the tanks had moved further in to Ash Sheikh Ajlin, Zeitun and a third neighbourhood, Tal al-Hawa, and were coming under mortar and RPG fire.
A military spokesman said warplanes had hit more than 60 targets on Monday, including 20 weapons-smuggling tunnels in Rafah, on the Egyptian border, and nine rocket launch sites.
Palestinian prime minister Salam Fayyad, whose remit is limited to the West Bank, said the Egyptian initiative offered the best hope of peace, putting pressure on both Israel and Hamas to respond positively.
"He who refuses, voices reservations or moves slowly on this initiative bears the responsibility of explaining themselves, especially to the people of Gaza," he said.
Arab League chief Amr Mussa said the bloc's foreign ministers would meet on Friday in Kuwait to discuss the conflict.
And UN chief Ban Ki-moon, who is to head to the Middle East on Tuesday, called on Israel and Hamas to immediately stop the fighting, saying "too many people have died."
Meanwhile, Israel suffered a reverse at the hands of the UN Human Rights Council, which adopted a resolution accusing it of "grave" human rights violations against Palestinians.
Attention was also focusing on the task of rebuilding Gaza after the war, with the Czech Republic, which currently holds the revolving EU presidency, saying it would convene a donor conference to address humanitarian needs.
Aid deliveries have been massively disrupted by the conflict, with agencies warning that residents are running out of food and even having to burn their furniture to stay warm in the bitterly cold nights.
By late Monday, Palestinian medics said at least another 26 people had been killed, bringing the overall Palestinian death toll to 918, including 277 children. Another 4,100 have been wounded.
Ten Israeli soldiers and three civilians have been killed in combat or by rocket attacks since the operation began on December 27.