Militants in Gaza fired more than 250 rockets into southern Israel, and Israel responded with airstrikes and artillery fire, ending weeks of relative calm and threatening efforts to forge a long-term truce.
Palestinians said at least four people, including a pregnant woman and a baby, were killed by Israeli strikes.
In Israel, rocket sirens blared, and thousands of Israeli civilians - as far as 50km from Gaza - spent the day in or close to bomb shelters. Rocket fire and airstrikes continued into the night.
The Israeli military said that its Iron Dome air-defence batteries intercepted dozens of the rockets. Israeli emergency services said an 80-year-old woman was seriously injured by shrapnel during the rocket barrage and a 50-year-old man was treated for moderate wounds.
In Gaza, health authorities said two men, aged 22 and 25, a 37-year-old pregnant woman and her 14-month-old daughter were killed as Israeli jets carried out airstrikes. An additional 18 people were injured.
Israeli officials said they hit dozens of "terror targets" inside the Palestinian enclave, which is controlled by the Palestinian militant group Hamas.
The violence comes in the midst of negotiations over a longer-term truce between Hamas and Israel, during which the militant group has tried to assert pressure with rocket fire and incendiary balloons. Hamas is attempting to secure an easing of Israeli restrictions on trade and movement, in return for a lull in violence.
However, the Israeli military said Islamic Jihad, Gaza's second-largest militant group, which is also involved in the negotiations, was responsible for the rocket fire.
It also said tanks and military jets targeted sites in the northern and eastern sections of Gaza, including an Islamic Jihad tunnel and Hamas military intelligence and general security buildings. The Israeli Army's chief of staff, Lieutenant General Aviv Kochavi, met senior security officials, and Prime Minister Benjamin Netanyahu was expected to be briefed.
The Turkish news agency Anadolu said its Gaza office had been hit in an Israeli strike.
UN peace envoy Nickolay Mladenov called for calm.
"Continuing down the current path of escalation will quickly undo what has been achieved and destroy the chances for long time solutions to the crisis," he said in a statement. "This endless cycle of violence must end, and efforts must accelerate to realise a political solution to the crisis in Gaza."
Israeli President Reuven Rivlin said Israel would "respond forcefully and swiftly to any attack on the security of our people."
Israeli authorities said schools in the cities of Beersheba, Ashkelon and Ashdod would be closed tomorrow.
In a joint statement, Gaza's militant factions said the rocket fire was in response to the "targeting and assassination" of their militants a day earlier. "Our response will be tougher and larger and broader in the face of aggression," they said in a statement.
The Israeli military reported that a day earlier two soldiers were lightly wounded in a shooting incident along its border with Gaza. In response, Israel struck sites belonging to the Izzedine al-Qassam Brigades, Hamas's military wing, killing two fighters. Two Palestinian protesters were killed taking part in ongoing weekly demonstrations at the border fence with Israel, the Palestinian Health Ministry said.