Israeli troops have demolished several Palestinian homes and raided an Islamist stronghold in Gaza City in retaliation for a weekend attack on an Israeli army post on the Gaza-Egypt border.
Israel had ordered more efforts to target militants after an attack that killed five Israeli troops on Sunday.
Touring the ruins of the army post, Israeli Defence Minister Shaul Mofaz said Israel would keep fighting until the Palestinian Authority began to act against the armed groups.
Israeli troops blew up seven homes in the southern Gaza refugee camp of Khan Younis after ordering residents to leave, Palestinian witnesses said. The army said it destroyed buildings it claimed was used as cover for firing rockets and mortars at Jewish settlements.
Israeli tanks later rolled up to Gaza City's Shijaia neighbourhood, a stronghold of Islamic militant groups sworn to destroying the Jewish state. Gunfire erupted between soldiers and militants.
There were no immediate reports of casualties in the clash.
Violence in Gaza has soared ahead of a planned Israeli pullout next year from the territory captured in the 1967 Middle East war, but the latest bloodshed has also sent a strong message of militant muscle to new Palestinian leaders.
A vote is scheduled on January 9th for a successor to Mr Arafat as Palestinian president.
The only candidate with a realistic chance, Mr Mahmoud Abbas, is a veteran official favoured by Israel and the United States who is expected to try to revive peace talks that stalled in 2000 before the Palestinian uprising erupted.
Palestinians fear Israeli Prime Minister Ariel Sharon's real aim is to strengthen Israel's hold on the West Bank in exchange for giving up impoverished Gaza, although Western countries support the plan as a possible step to peace.