Israeli troops battled Palestinian gunmen in a suburb of Gaza City Sunday in one of the fiercest ground battles so far as Israel's military inched toward Gaza's population centers.

A top Israeli defense official said Hamas has been badly hurt by the offensive in Gaza - especialy by the deaths of senior militants and shortages of ammunition - but predicted that the group would fight on.
The group "is not expected to raise a white flag," military intelligence chief Amos Yadlin told the Israeli Cabinet Sunday.

The fighting in the Sheikh Ajleen neighborhood erupted before dawn and continued through the morning as Israeli infantrymen and tanks advanced toward Gaza City and its approximately 400,000 residents, Palestinian witnesses said. Hamas and the smaller militant group Islamic Jihad said they ambushed the Israelis, leading to some of the heaviest fighting since Israel sent ground forces into the coastal territory on Jan. 3.

Gunfire subsided in the early afternoon, with the Israelis in control of buildings on the neighborhood's outskirts.
Israel launched its offensive against Hamas on Dec. 27 in an attempt to halt years of rocket fire from Gaza at Israeli towns. Gaza health officials have counted more than 820 Palestinians dead and say at least half are civilians. The Israeli military says troops have killed some 300 armed fighters since the ground offensive began and that many more were killed in the week of aerial bombardments that preceded it.

Thirteen Israelis have died, three of them civilians.

"Israel is nearing the goals which it set itself, but more patience, determination and effort is still demanded," Israeli Prime Minister Ehud Olmert said ahead of his government's weekly meeting Sunday.

The U.N. Security Council called for an immediate cease-fire Thursday, but Olmert said Israel "never agreed that anyone would decide for us if it is permissible to strike at those who send bombs against our kindergartens and schools."

Hamas, the Islamic group whose government controls Gaza but is not recognized internationally, likewise has ignored the resolution, complaining that it was not consulted.

Israel wants a guarantee that any cease-fire would end Hamas rocket fire and weapons smuggling from Egypt. Hamas is demanding that Israel open Gaza's blockaded border crossings. Israel is unlikely to agree to that condition because it would hand Hamas a victory and allow the group to strengthen its hold on the territory it violently seized in June 2007.

Israeli defense officials say they are prepared for a third stage of their offensive, in which ground troops would push further into Gaza, but are waiting for approval from the government. Israel dropped leaflets on Gaza on Saturday warning of a wider offensive.

The first phase was the massive aerial bombardment, and the second saw ground forces enter Gaza, seize open areas used to fire rockets and surround Gaza City. The officials, speaking on condition of anonymity because military plans have not been made public, said the army also has a contingency plan for a fourth phase - the full reoccupation of Gaza and toppling of Hamas.

"We are safe, but we don't know for how long," said Khamis Alawi, 44, who huddled with his wife and six children in their kitchen overnight. He said bullets riddled his walls and several came in through the windows.

Hamas militants launched barrages of rockets at the Israeli city of Beersheba and at the town of Sderot. Hamas has been hard-hit by the Israeli offensive, but continued to fire rockets from Palestinian residential areas, paralyzing much of southern Israel.

Israeli warplanes bombed targets along the Egypt-Gaza frontier near the town of Rafah early Sunday, shattering windows at the border terminal. The area is riddled by tunnels used to smuggle weapons and supplies into Gaza, and has been repeatedly bombed throughout the Israeli offensive.

At least 20 Palestinians had been killed across Gaza by midday Sunday, according to Gaza health officials. Most were noncombatants, they said, including four members of one family killed when a tank shell hit their home near Gaza City. There was no word on Israeli casualties.

The military says Hamas fighters are wearing civilian clothes and endangering civilians by operating out of heavily populated residential areas.

Palestinian witnesses said Israeli forces fired phosphorus shells early Sunday at Khouza, a village near the border, setting a row of houses on fire. Hospital official Dr. Yusuf Abu Rish said a woman was killed and more than 100 injured, most suffering from gas inhalation and burns.

Israeli military spokesman Capt. Guy Spigelman denied the claims. One of the main uses of phosphorous shells is to create smoke and mask ground forces, which is legal under international law, but the chemical can be harmful if used in densely populated areas.

Damascus-based Hamas leader Khaled Mashaal made a fiery speech on Arab news channel Al-Jazeera, describing the Israeli assault as a "holocaust." Still, Hamas teams were in Cairo to discuss a cease-fire proposed by Egypt.

Struggling to keep peace efforts alive, Egyptian President Hosni Mubarak has urged Israel and Hamas to agree to a truce. German Foreign Minister Frank-Walter Steinmeier was set to hold talks with Israeli leaders Sunday in Egypt in an attempt to advance the Security Council's cease-fire call.

"Israel must be persuaded to let the firearms rest now," Steinmeier told reporters Sunday.

One of the deadliest single incidents since the offensive began was an Israeli strike near a U.N. school Tuesday that Gaza health officials said killed 39 Palestinians. On Sunday, Israeli defense officials said an investigation by the military concluded that an Israeli mortar shell missed its target and hit near the school.

The Israeli investigation concluded that troops fired three mortar shells at Hamas militants who had just launched a rocket, the officials said. Two shells hit the target, but a third missed by about 30 yards, striking near the school and killing bystanders. The Israeli military believes the number of casualties was inflated by Hamas.

The defense officials spoke Sunday on condition of anonymity because the investigation has not been made public, and there was no official comment from the military.

The U.N. agency in charge of Palestinian refugees has resumed its operations after suspending them because of Israeli attacks on its convoys. U.N. Relief and Works Agency spokesman Christopher Gunness said nine aid convoys were planned Sunday, but that the Israeli military had to "stand up and deliver" on its promises to allow aid to reach Gaza civilians.

But the international Red Cross said Sunday it was halting its service of escorting Palestinian medical teams after one of its ambulances came under fire on Saturday during a three-hour lull declared by Israel to allow aid groups to do their work in besieged areas.

Red Cross spokesman Iyad Nasr said his organization is still investigating the source of the fire.

The Red Cross escorts are meant to provide extra protection to Palestinian ambulances and guarantee that all occupants are civilians. In the past Israel has charged that ambulances have been used to transport militants and arms.