Palestinian bulldozers have blocked roads in northern Gaza as Israeli tanks and troops continue their mass build-up on the border.
Israel has rejected a demand by Palestinian militants to release Palestinian women and children it holds prisoner in return for information on an Israeli army soldier captured by militants on Sunday.
Abducted Israeli soldier Gilad Shalit
Israeli media said this morning the government had approved a contingency plan to cut food, water and gas supplies to the coastal strip if Cpl Gilad Shalit, a 19-year-old conscript was not freed.
Israel also warned that Hamas leaders, including the group's supreme leader Khaled Meshaal who lives in exile in Damascus, could become assassination targets.
"They have to understand one thing, that nobody is immune, including Khaled Meshaal. Nobody is immune," cabinet minister Benjamin Ben-Eliezer said.
The United States has urged Israel to give diplomacy a chance to win the release of Corporal Gilad Shalit. En route to Pakistan, US Secretary of State Condoleezza Rice said: "There really needs to be an effort now to try and calm the situation."
Militants wielding automatic rifles and anti-tank rockets are preparing for the predicted Israeli invation, rigging explosive devices and building barricades as tensions hit their highest since Israel's partial withdrawal nearly a year ago.
A spokesman for Hamas's armed wing, warned Israel of a "painful" response if its forces entered Gaza. "The enemy will regret the moment they raid Gaza. The price will be so heavy," said the spokesman.
The Islamic Jihad militant group called for a general mobilization of its fighters "in anticipation for the looming Zionist aggression." The group is believed to have several thousands armed members.
Corporal Gilad Shalit was captured during Sunday's attack on a military post in which two other soldiers were killed. Fighters from Hamas and a number of other factions entered Israel through a tunnel dug under a Gaza border fence to attack the military post.
Meanwhile, Israeli police said they were taking seriously reports that a Jewish settler was abducted by Palestinian militants in the West Bank.
Israel Radio quoted the man's relatives as saying he did not return home last night. The report said the man had been hitchhiking.
In the Gaza Strip, a spokesman for the Popular Resistance Committees claimed his group had abducted the settler. The PRC was involved in Shalit's abduction.