28 Palestinians and 3 Israelis die in Gaza fighting

9.40am UPDATE

JABALYA, Gaza- Twenty-eight Palestinians and three Israelis were killed on Thursday, Gaza's bloodiest day in four years of conflict, as Israel's army struck back after a rocket attack killed two Israeli children at a border town.

Prime Minister Ariel Sharon approved an intensified offensive to re-occupy Palestinian-run parts of northern Gaza and stop rocket firing that has persisted despite raids and given fuel to critics of his plan to relinquish the territory.

In the deadliest incident of the spiralling violence, an Israeli tank shell killed seven Palestinians near a school in Jabalya, Gaza's largest refugee camp, as Israeli forces thrust deep into the militant stronghold for the first time.

Palestinian witnesses said the dead from the tank shell blast were all teenagers with no involvement in the heavy fighting that raged through the camp. "The explosion was so big it scattered body parts in nearby houses," a medic said.

While voicing regret for civilian casualties, a senior Israeli commander said a tank fired at armed men after they detonated a bomb that wounded several soldiers, and launched an anti-tank rocket at Israeli forces operating nearby.

Israeli troops raiding northern Gaza killed 21 other people, including militants and bystanders. Medics said about 150 Palestinians were wounded. Earlier on Thursday, gunmen shot and killed two Israeli soldiers and a woman out jogging.

A Hamas rocket attack on the southern Israeli town of Sderot on Wednesday killed two Israeli children, aged 2 and 4, visiting their grandparents on the eve of the Jewish festival of Sukkot.

The latest cycle of bloodshed has sent Sharon scrambling to counter right-wing critics who say his plan to withdraw troops and settlers from occupied Gaza next year has emboldened militants trying to give the impression that Israel is being driven out.

Israel's army appears determined to smash militant groups before leaving.

"The formula is clear -- blood for blood, bombardment for bombardment," a Hamas gunman said in Jabalya, where witnesses said armoured bulldozers had ploughed through houses to clear a path into the crowded camp of 100,000 inhabitants.

The army said its forces had to make their way under heavy fire through streets booby-trapped with bombs.

It was Israel's deepest thrust into Jabalya's narrow alleys in four years of conflict, a move the army had previously avoided for fear that troops and armour would be too vulnerable.

Officials said Sharon had approved an offensive called "Days of Reckoning" that would mean continual raids in northern Gaza Strip towns and refugee camps for "an extended period".

"We are going to clean up the rocket crews," said one. "We are not leave Gaza under the shadow of Qassam rockets."

Condemning the two-day old incursion, Palestinian President Yasser Arafat called on world leaders to "immediately intervene to stop the continued massacres".

Under cover of fog, two gunmen from Hamas, a faction behind a campaign of suicide bombings and sworn to Israel's destruction, attacked an army position near Jabalya before dawn. A soldier was killed before troops shot dead the militants.

Hours later, Hamas gunmen killed a woman taking a morning jog between Jewish settlements and then shot dead an army medic who rushed to her aid. Soldiers killed two attackers.

Palestinian medical sources said a 60-year-old Palestinian was later killed by Israeli fire in the area, and a 27-year-old farmer was shot dead working in a nearby field.

Violence surged on Wednesday when Palestinian militants mounted the deadly rocket attack on Sderot, and troops killed nine Palestinians in raids in the Gaza Strip and the West Bank.

Two makeshift Qassam rockets hit the town, close to Israel's fenced border with Gaza, killing a girl aged 2 and a boy aged 4.

- REUTERS