Fifty-four people, including two dozen civilians, were killed as clashes between Israeli troops and Palestinian militants escalated today.
Gaza Health Ministry official Dr Moaiya Hassanain said 160 people were wounded, 14 of them, including a baby, critically.
At least two children were also among those killed, and militants said 19 fighters died.
The death toll includes four people who were killed in an airstrike on a police station in the southern town of Rafah, Palestinians said. At least two of the dead were police.
Two Israeli soldiers also died in the deadliest day of violence in Gaza since Islamic Hamas militants seized control in June.
West Bank leaders threatened to suspend peace talks in protest at the Israeli attacks, which came as Gaza militants bombarded southern Israel with more than 50 rockets and mortars.
Palestinian fighters kept up a steady stream of rocket and mortar attacks on Israeli targets, undeterred by Israeli shelling from tanks and airstrikes.
Six Israelis were wounded, all but one of them slightly, in rocket fire that reached as far north as Ashkelon, 11 miles from Gaza.
The violence came amid Israeli threats to launch a broad invasion of Gaza, and just days before US Secretary of State Condoleezza Rice was due to arrive in the region on her latest peacekeeping mission.
The bloodletting began before midnight last night in the northern town of Beit Hanoun, where a 13-month-old girl, Malak Karfaneh, was killed by shrapnel.
Hamas blamed Israel, but residents said a militant rocket fell short and landed in the area of the baby's house.
Before dawn today, the battleground shifted to Jebaliya, a centre of militant activity in northern Gaza.
Soldiers backed by tanks and aircraft conducted house-to-house searches and took up positions on rooftops as they clashed with militants detonating land mines and firing heavy machine guns, assault rifles and mortar rounds.
By evening, more than 40 Palestinians and two Israeli soldiers were dead.
Israeli aircraft also travelled further south to demolish a house belonging to a Hamas militant in Gaza City.
The house was empty, but a woman and her two sons in a nearby building were killed, and a two-month-old grandson was critically wounded.
Israel said the building was used to produce and store weapons.
In all, more than 70 Palestinians, including around 40 civilians, have been killed since fighting flared on Wednesday.
Palestinian rocket fire earlier in the week also killed an Israeli man. The rocket assaults grew more ominous when a projectile struck closer to Israel's heartland.
Yesterday, Israeli Deputy Defence Minister Matan Vilnai renewed a threat to invade Gaza to crush militant rocket squads that attack southern Israel daily.
Chief Palestinian negotiator Ahmed Qureia said Palestinian leaders, including President Mahmoud Abbas, recommended calling off peace talks at a meeting today in the West Bank town of Ramallah.
"What is happening in Gaza is a massacre of civilians, women and children, a collective killing, genocide," Mr Qureia said. "We can't bear what the Israelis are doing, and what the Israelis are doing doesn't lend the peace process any credibility."
Israeli officials also met today to discuss the Gaza violence. Foreign Ministry spokesman Arye Mekel said as far as Israeli was concerned, talks are "based on the understanding that when advancing the peace process with pragmatic (Palestinian) sources, Israel will continue to fight terror that hurts its people."
Talks resumed in November after a seven-year breakdown at a US-sponsored conference. At the gathering, the two sides pledged to try to reach an accord by the end of this year. In recent weeks, negotiators have met almost daily.
The rising tide of violence threatened to cripple peace efforts, however.
Mr Abbas condemned the ballooning civilian death toll.
"The response to these rockets can't be that harsh and heinous," he said. "It is nowadays described as a holocaust."
But Israeli government spokesman David Baker said Israel was "compelled to continue to take these defensive measures" to protect more than 200,000 Israelis living under the threat of Palestinian rocket barrages.
Hamas remained defiant.
"If (Israeli officials) decided stupidly to invade Gaza, we will fight them with God's help," Hamas' supreme leader, Khaled Mashaal, told reporters from his base in Damascus, Syria. "We will fight them like lions."
The violence likely will overshadow Ms Rice's visit to the region next week, meant to nudge Israel and Palestinians closer to an accord.
Senior European diplomat Javier Solana will also visit the region beginning tomorrow, to encourage Israeli and Palestinian leaders to keep the peace process on track, his office said in a statement.
Even when violence is at a lower level however, Mr Abbas' efforts are compromised by the fact that he only rules the West Bank, while Gaza is controlled by Hamas.
Major Avital Leibovich, spokeswoman for the Israeli military, called today's action, which involved ground, armoured and air forces, a "pinpoint operation" provoked by a rocket attack on Ashkelon earlier in the week.
She blamed the high civilian toll on Hamas' practice of using homes to store and produce projectiles.
"We are not targeting homes and we have no intentions of targeting uninvolved civilians," she said. "We will target launchers and Hamas militants, and bunkers."