Israel struck at the heart of the Palestinian government on Sunday, hitting the Gaza office of the Hamas prime minister in a new wave of air raids and warning it would use all its power to free a soldier captured by militants a week ago.
The armed wing of Hamas threatened to retaliate by resuming attacks inside Israel, predicting the region would sink in a "sea of blood" if the Israeli offensive continued.
"The Ezzedine al-Qassam Brigades warn the Zionist enemy: if its operations continue, we will hit the occupation targets we were previously reluctant to strike," said a statement received by AFP in Gaza City.
Israeli Prime Minister Ehud Olmert vowed his government would not bow to "blackmail" as Palestinians cautioned that Egyptian-led mediation efforts under way to free the captured 19-year-old corporal, Gilad Shalit, were faltering.
"Efforts continue but so far in vain. We are near an impasse," Palestinian leader Mahmud Abbas's spokesman Nabil Abu Rudeina told reporters.
Israel has launched its biggest military operation in a year over the captured soldier, sending troops back into the Gaza Strip last week and launching wave after wave of air raids after nightfall.
And in a dramatic new warning to the embattled Palestinian administration, helicopter gunships fired on the office in Gaza overnight of Hamas premier Ismail Haniya, setting the building ablaze.
"It's an attack against a Palestinian symbol," said Haniya, who was not in the office at the time.
"We ask the international community and the Arab League to take its responsibilities towards our people and intervene" to end what he called Israel's "insane policy."
Abbas, inspecting the damage done to the prime minister's office, lashed out at Israel.
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