At least two Israeli soldiers and two Palestinian militants have been killed in an attack on an Israeli army position near the Gaza Strip. One Israeli soldier was seized.
Eight Palestinian militants attacked an Israeli army post, entering Israel through a tunnel under the Gaza border fence.
An Israeli tank and armored personnel carrier were blown up during heavy exchanges of fire. A militant group, called the Popular Resistance Committees, claimed responsibility for the attack, saying it was revenge for the killing of its leader and 14 civilians in recent Israeli air strikes. Gunmen from the Islamic militant group, Hamas, which heads the Palestinian Authority, took part in the raid.
The army says an Israeli soldier was kidnapped during the attack and is believed to be alive.
It was the first successful infiltration since Israel pulled out of Gaza last summer, and Prime Minister Ehud Olmert threatened to strike back.
"We hold the Palestinian Authority responsible for this attack, with all that implies," Mr. Olmert said.
The Israeli army chief blamed Hamas - a hint that Israel might target Palestinian leaders and institutions.
Moderate Palestinian President Mahmoud Abbas condemned the attack. He urged the United States, the United Nations and Egypt to appeal to Israel for restraint, and avoid an escalation.
Israel gave the Palestinians an ultimatum, return the kidnapped soldier within 24 hours, or face harsh retaliation.