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GAZA CITY, Gaza Strip – Israeli troops advanced into Gaza suburbs for the first time early Tuesday, residents said, hours after Prime Minister Ehud Olmert warned Islamic militants of an "iron fist" unless they agree to Israel's terms to end the fighting. Hamas showed no signs of wavering, however, with its leader, Ismail Haniyeh, saying the militants were "closer to victory."

Despite the tough words, Egypt said it was making slow but sure progress in brokering a truce, and special Mideast envoy Tony Blair said elements were in place for a cease-fire.

Sounds of the battle could be heard clearly before dawn Tuesday around the city of 400,0000 as the Israeli forces, backed by artillery and attack helicopters, moved into neighborhoods east and south of Gaza City. Israeli gunboats shelled the coast from the west.

The Palestinian residents told The Associated Press that Israeli tanks rolled into public areas of the Tel Hawwa neighborhood, pushing back militants. Tens of thousands of Palestinians live in apartment buildings in the neighborhood south of Gaza City.

One of the residents, Khader Mussa, 35, told The Associated Press by telephone that he saw two apartment buildings on fire. He said he was huddling in the basement of his building with 25 other people, including his pregnant wife and his parents. "The gates of hell have opened," he said. "God help us."

Several other buildings were on fire, witnesses said, including a lumberyard. Thick smoke blanketed the area.

The Israeli military confirmed that a battle was in progress but gave no details.

On Monday, as diplomats struggled for traction in truce efforts, Olmert stood within Hamas rocket range and said Israel would only end military operations if Hamas stops rocketing Israel, as it has done for years, and is unable to rearm after combat subsides.

"Anything else will be met with the Israeli people's iron fist," Olmert said. "We will continue to strike with full strength, with full force until there is quiet and rearmament stops."

As he spoke in Ashkelon, Israeli tanks, gunboats and warplanes hammered suspected hiding places of Hamas operatives who control the poor, densely populated territory just across the border. The Israeli military said Hamas fired about 20 rockets at Israel on Monday, fewer than previous days.

Just a few hours earlier, a rocket hit a house in Ashkelon but caused no casualties. Olmert addressed regional mayors in the relative safety of the basement of a public building during his two-hour visit.

Later, he tempered his tough talk, saying: "I really hope that the efforts we are making with the Egyptians these days will ripen to a result that will enable us to end the fighting."

Ashkelon is 10 miles from the border with Gaza. The Israeli military says Hamas has Iranian-supplied rockets that can reach 25 miles into southern Israel.

Meanwhile, Gaza's Hamas prime minister insisted on an Israeli withdrawal from Gaza and the opening of blockaded border crossings as part of any truce.

"As we are in the middle of this crisis, we tell our people we, God willing, are closer to victory. All the blood that is being shed will not go to waste," Haniyeh said on Hamas Al Aqsa television. But he said the group was also pursuing a diplomatic track to end the conflict that "will not close."

Haniyeh sat a desk in a room with a Palestinian flag and a Quran in the background. His location was unclear; Israeli airstrikes have targeted militant chiefs, and most are in hiding.

The fighting began Dec. 27 and has killed more than 900 Palestinians, about half of them civilians, according to Palestinian medical officials. Thirteen Israelis, including 10 soldiers, have been killed.

Inside Gaza, an Israeli battalion commander identified only as Lt. Col. Yehuda said Monday that troops had not met significant resistance and had found several houses booby-trapped either with regular explosives, or by sealing the windows and doors and opening cooking gas valves.

"A couple of days ago, an armed squad popped up from a tunnel that was concealed by a nearby building. We took them out with tank fire and a bulldozer," he said.

In another incident, the commander said, his men spotted a suicide bomber on a bicycle.

"He ran off to take cover in a building, presumably to draw us in," Yehuda said. "We demolished the building on top of him with a bulldozer."

Brig. Gen. Eyal Eisenberg said troops were "tightening the encirclement" of Gaza City and were "constantly on the move."

The comments by Yehuda and Eisenberg were approved by Israeli military censors. They spoke to a small group of reporters who accompanied Israeli units inside Gaza. Israeli forces have not allowed journalists to enter Gaza to cover the war.

Israeli warplanes pounded suspected Hamas positions in Gaza City, and navy gunboats fired at least 25 shells. Smoke billowed over buildings.

At least 20 Palestinians died Monday, some of them from wounds suffered on previous days, Gaza health officials said.

A girl, a doctor and a Hamas militant were killed in the northern Gaza Strip, said Basim Abu Wardeh, head of Kamal Adwan hospital.

The doctor rushed to evacuate the wounded from a building where two airstrikes had taken place and was killed by a third, Abu Wardeh said. Four other medics were injured, one critically.

The Israeli military said four soldiers were injured, one seriously, in what an initial inquiry concluded was a "friendly fire" incident in northern Gaza.

Israel has sent reserve units into Gaza to help thousands of ground forces already in the territory, and fighting has persisted despite a U.N. Security Council resolution calling for a cease-fire. Egypt has assumed a role as mediator between Israel and Hamas.

Talks "are progressing slowly but surely because each party wants to score some points," Hossam Zaki, the spokesman for Egypt's Foreign Ministry, told the British Broadcasting Corp. "We would like to be able to bridge some gaps and then proceed immediately to a cease-fire."

Zaki, however, said Egypt could not provide certain guarantees that Israelis seek, such as a halt to rocket fire.

"We'll enhance our efforts, but this is not an issue between Israel and Egypt," Zaki told the BBC. "It is an issue between Israel and Gaza, and this is something that will have to be worked out, as the (U.N.) Security Council says, in Gaza."

Much of the diplomacy focuses on an area of southern Gaza just across the Egyptian border known as the Philadelphi corridor that serves as a weapons smuggling route, making Egypt critical to both sides in any deal. The name of the corridor is an Israel military label.

Israel wants those routes sealed and monitored as part of any peace deal, and has been bombing tunnels that run under that border.

"I think the elements of an agreement for the immediate cease-fire are there," Blair said in Cairo. He added that, while more work needed to be done, he hoped to see a cease-fire "in the coming days."

Israeli Defense Ministry official Amos Gilad planned to travel Tuesday to Egypt for talks.

In Paris, French Foreign Minister Bernard Kouchner said European military observers should be sent to Gaza to monitor any eventual cease-fire.

Israel's chief military spokesman, Brig. Gen. Avi Benayahu, said the fighting was "difficult and complex" and that Hamas militants were setting boobytraps and firing missiles from the rooftops of civilian homes.

"There is a whole city built underground in Gaza. Lots of big weapons warehouses," Benayahu said. Soldiers also uncovered a tunnel dug inside Gaza that led 300 yards into Israel, he said.

In Monday's fighting, the army said it carried out more than 25 airstrikes, hitting squads of gunmen, mortar launchers and two vehicles carrying Hamas militants.

It said ground troops came under fire from militants in a mosque. An Israeli aircraft attacked the squad, and Israeli troops then took over the mosque, confiscating rockets and mortar shells.

With Israeli troops surrounding Gaza's main population centers, Israeli leaders have said the operation is close to achieving its goals. Security officials say they have killed hundreds of Hamas fighters, including top commanders, but there has been no way to confirm the claims.

Aid agencies said they have resumed relief operations in Gaza, but fighting still prevents them from evacuating the sickest people and reaching all those who need help.

International aid groups, however, say Israel is not doing enough to protect Palestinian civilians as well as aid workers.

As many 88 percent of Gaza's residents now require food aid, up from 80 percent before the war, said Helene Gayle, president of the international aid agency CARE.

GAZA CITY, Gaza Strip – Israel resumed its Gaza offensive Wednesday, bombing heavily around suspected smuggling tunnels near the border with Egypt after a three-hour lull to allow in humanitarian aid. Hamas responded with a rocket barrage.

AP – Palestinians pray over the bodies of people killed near a United Nations school Tuesday,

Despite the heavy fighting, strides were made on the diplomatic front with the U.S. throwing its weight behind a deal being brokered by France and Egypt.

While the Security Council failed to reach agreement on a cease-fire resolution, Egyptian diplomats said Egypt will host separate talks with Israel, Hamas and the Palestinian Authority in Cairo Thursday, but there would be no meeting between Israel and Hamas.

Israeli airstrikes killed 29 Palestinians on Wednesday after leaflets were dropped warning residents to leave the area "because Hamas uses your houses to hide and smuggle military weapons."

The fighting continued into Thursday. Palestinians reported more than 20 airstrikes around Gaza before dawn, killing one person and wounding 10. There were also reports of clashes between Israeli armored forces and Hamas militants in southern Gaza.

The casualties brought the total Palestinian death toll during Israel's 12-day assault to 689 and drove home the complexities of finding a diplomatic endgame for Israel's Gaza invasion. Ten Israelis have been killed, including three civilians, since the offensive began Dec. 27.

More than 5,000 people have fled the border area, seeking refuge at two U.N. schools turned into temporary shelters.

The fury of the renewed fighting made it appear each side was scrambling to get in as many hits as possible before a truce could materialize.

"I feel like the ground is shaking when we hear the shelling. People are terrified," said Fida Kishta, a resident of the Gaza-Egypt border area where Israeli planes destroyed 16 empty houses.

In Turkey, a Mideast diplomat who spoke on condition of anonymity because he was not authorized to speak publicly said that country would be asked to put together an international force that could help keep the peace. And diplomats in New York worked on a U.N. Security Council statement backing the cease-fire initiative but failed to reach agreement on action to end the violence.

"We are very much applauding the efforts of a number of states, particularly the effort that President (Hosni) Mubarak has undertaken on behalf of Egypt," Secretary of State Condoleezza Rice said. "We're supporting that initiative."

The army, which has refused to allow journalists into Gaza, permitted two TV teams to accompany soldiers on patrol for the first time. The footage showed soldiers walking through a deserted street in an unidentified location in Gaza.

The Israeli military correspondent who accompanied the soldiers said they were concerned about Hamas booby-traps. He said they were shooting through walls, throwing grenades around corners, going from house to house looking for Hamas gunmen and using bomb sniffer dogs. Buildings showed bullet and shrapnel marks. "We used a lot of fire," said an officer in the group, Lt. Col. Ofer.

Hamas, meanwhile, fired rockets, though at a slower pace than previous days, hitting the towns of Ashkelon and Beersheba with the sort of longer range missiles never seen before this war. Rockets were still hitting the cities after midnight, but there were no immediate reports of injury.

Despite the violence, a surprise announcement in Paris on Wednesday put a spotlight on diplomacy.

French President Nicolas Sarkozy said that both Israel and the Palestinian Authority had accepted the cease-fire deal, but he made no mention of Hamas, without whom no truce could work. The Palestinian Authority controls only the West Bank while Hamas rules Gaza — two territories on opposite sides of Israel that are supposed to make up a future Palestinian state.

Later, Israeli officials made it clear Sarkozy's statement was not exactly accurate.

"Israel welcomes the initiative of the French president and the Egyptian president to bring about a sustainable quiet in the south," said Israeli government spokesman Mark Regev.

But for Israel to accept the proposal, he said, "there has to be a total and complete cessation of all hostile fire from Gaza into Israel, and ... we have to see an arms embargo on Hamas that will receive international support."

For its part, Hamas said it would not accept a truce deal unless it includes an end to the Israeli blockade of Gaza — something Israel says it is not willing to do.

"There must be guarantees to ensure Israel will not breach this package, including halting the aggression, lifting the blockade and opening the crossings," said Ghazi Hamad, a senior Hamas adviser.

Growing international outrage over the human toll of Israel's offensive, which includes 3,000 Palestinians wounded — could work against continued fighting. So could President Bush's departure from office this month and a Feb. 10 election in Israel.

But Israel has a big interest in inflicting as much damage as possible on Hamas, both to stop militant rocket fire on southern Israeli towns and to diminish the group's ability to play a spoiler role in peace talks with Palestinian moderates.

The Israeli Cabinet formally decided on Wednesday to push ahead with the offensive while at the same time pursuing the cease-fire option. Israeli officials also rejected Hamas' call to open the border crossings, which Israel has largely kept closed since the group seized the territory by force in June 2007.

The military has called up thousands of reserve troops that it could use to expand the Gaza offensive. Defense officials said the troops could be ready for action by Friday.

Still, Israel briefly suspended its offensive Wednesday to allow humanitarian supplies to reach Gaza, and Israeli officials said such lulls would be declared on a regular basis.

The announcement came among growing warnings by the World Bank and aid groups of a humanitarian crisis. The Word Bank pointed to a severe shortage of drinking water and said the sewage system is under growing strain.

Solafa Odeh, a resident of the northern Gaza Strip town of Beit Lahia, said around 100 people in her community were lining up for fresh water outside a local grocery store Wednesday. "We were only allowed half a gallon each, and I saw some people walk away with their jerry cans empty," Odeh said.

Of the 688 Palestinians killed since Dec. 27, some 350 were civilians, among them 130 children, according to Palestinian officials.

During Wednesday's lull, Israel allowed in 80 trucks of supplies as well as industrial fuel for Gaza's power plant. Medics tried to retrieve bodies in areas that had previously been too dangerous to approach.

The Palestinian Red Crescent said in a statement that one of its ambulance drivers was shot by Israeli soldiers during the lull. The Israeli military said it had no knowledge of the incident.

Medic Mohammed Azayzeh in central Gaza pulled out three people, killed by shrapnel fire Sunday, from the border town of Mughraqa, where Israeli tanks had settled nearby. The medic said he also found a dead family of three, including a father cradling a 1-year-old boy.

In the Jebaliya refugee camp, residents on Wednesday held a mass funeral for 40 people killed a day before by Israeli mortar fire toward a U.N. school. Israel says Hamas militants fired mortar shells from an area near the school, and that Israeli responded to this attack.

The bodies, wrapped in blankets, were laid out in a long row on the ground, with mourners kneeling in Muslim prayer before them. Among the mourners was Mushir al-Masri, a Hamas legislator.

Also Wednesday, Israel released footage of suspected Hamas militants captured by Israeli troops. Israel's chief army spokesman, Brig. Gen. Avi Benayahu, said 120 suspected militants have been captured. He also said soldiers conducting searches have uncovered many explosive devices and tunnels.

"We uncovered many tunnels for kidnapping soldiers, at least one car bomb, booby trapped dolls, tunnels — an underground city," Benyahu said on Israel TV's Channel 10.