Israeli war planes and gunboats destroyed targets in the Gaza Strip Monday, including homes of Hamas leaders, as special Mideast envoy Tony Blair said after a meeting in Cairo with Egyptian President Hosni Mubarak that "the elements of an agreement" for a cease-fire are in place.

Blair, the former British prime minister, spoke amid intense negotiations aimed at bringing the 17-day war to a halt. Both Israel and Hamas are participating.

But as the talks proceeded in Cairo, Israeli leaders were holding separate discussions in Jerusalem, deciding whether to escalate the operation to a new, third phase.

Prime Minister Ehud Olmert favors an escalation, Israeli officials say, while Foreign Minister Tzipi Livni and Defense Minister Ehud Barak advocate ending the offensive while Israeli casualty figures remain relatively low.

In an interview with Israel Radio Monday, Livni said Israel had succeeded in proving to Hamas it is serious about deterrence.

"Israel is a country that reacts vigorously when its citizens are fired upon, which is a good thing," she said. "That is something that Hamas now understands and that is how we are going to react in the future, if they so much as dare fire one missile at Israel."

On the ground in Gaza, active-duty Israeli forces were joined by reserves Monday in tightening their grip on Gaza City, the territory's main population hub. The third phase is expected to feature an assault on Gaza's crowded cities and refugee camps, where Hamas leaders are believed to be hiding.

Israel is seeking an end to Hamas rocket fire, but Hamas and its allies continued to fire rockets into southern Israel Monday morning. There were no reports of major injuries. Olmert has declared that Israel is "close" to achieving its goals in the conflict but is not there yet.

An Israeli push into Gaza City on Sunday produced some of the fiercest fighting yet of the 16-day war against Hamas. The Israeli advance marked a possible precursor to a new phase of the conflict, in which Israeli forces engage Hamas and its allies in sustained urban combat. Despite international pressure to halt the fighting, which has wreaked havoc for Gaza's 1.5 million people, it could well grow more intense. Israel announced for the first time Sunday night that reservists had joined the fight and were operating in Gaza.

The Israeli military has been warning for days that it would soon begin a "third phase" of its offensive in Gaza, after a week of air raids and another week of ground operations by regular-duty forces. Tens of thousands of Israeli reservists had been called up and massed along the border, ready to support a possible push into Gaza's major population centers, where Hamas leaders are believed to be hiding.

The Israeli military said Sunday night that reservists had gone into Gaza several days ago, though the number was relatively small, according to an Israel Defense Forces spokeswoman, Maj. Avital Leibovich. Thousands of active-duty soldiers are already operating in the strip.

As of late Sunday night, the troops -- both active-duty and reserve -- remained in the open areas on the fringes of Gaza's cities and refugee camps. But in the pre-dawn hours Sunday morning, tanks backed by helicopter gunships had made their furthest push yet into the Gaza City area, home to 400,000 people. Hamas and Islamic Jihad claimed that they ambushed the advancing troops in a Gaza City suburb, Sheikh Ajleen, prompting a pitched battle that ended in the early afternoon.

In the fighting, 27 Palestinians were killed, according to medical officials in Gaza. There was no report of Israeli casualties. The overall Palestinian death toll rose to 876 on Sunday, the medical officials said, as many as half of whom were civilians. Thirteen Israelis have been killed since the war began Dec. 27.

While the tanks later retreated, their foray into the outskirts of Gaza City could be a prelude to the sort of urban warfare that would mark any Israeli advance into the sprawling, densely packed cities and refugee camps where most Gazans live.

"We have to push Hamas into the corner," said Yaakov Amidror, a retired major general who served as the military's chief of research and assessment. "The way to do that is to control the ground, and to control the ground we have to go in with more forces."

Such a mission would be high-risk and would probably elevate the casualty toll on both sides. But pressure has been building in Israel for the military to capitalize on its success and destroy what remains of Hamas authority in Gaza. Until now, Olmert has said that that is not his goal; he instead has defined a more limited objective of stopping or greatly reducing Hamas rocket fire.

"Israel is getting close to achieving the goals it set for itself," Olmert told his cabinet during their weekly meeting Sunday. "But patience, determination and effort are still needed to realize these goals in a manner that will change the security situation in the south."

According to Israeli news reports, Olmert and his two top deputies, Foreign Minister Tzipi Livni and Defense Minister Ehud Barak, disagree over how the war should end, and the three have argued in recent days over whether Israel should seek a cease-fire with Hamas or unilaterally declare victory. With Israeli elections a month away, the stakes in the war are high for both Livni and Barak, who are vying to succeed Olmert.

Despite Israel's relentless bombardment of Hamas-affiliated targets, rockets continued to fly out of Gaza on Sunday, with more than 20 launched into Israel. Several landed in the city of Beersheba, 25 miles away, although no major injuries were reported.

Top Israeli defense officials told Israel's cabinet Sunday that Hamas's capabilities had been badly damaged by the offensive in Gaza but that the Islamist movement would not end its attacks. Hamas "is not expected to raise a white flag," military intelligence chief Amos Yadlin told the Israeli cabinet, according to the cabinet's secretary.

On Saturday, Hamas leader Khaled Meshal was defiant in a videotaped speech from Damascus, saying that Palestinians in Gaza would keep fighting and that Hamas would not consider a cease-fire until Israel ended its offensive and opened the border crossings. Even as he spoke, however, a Hamas delegation was holding talks in Cairo, which continued Sunday. Israel was planning to send a senior Defense Ministry official, Amos Gilad, on Monday.

Israel says it wants Hamas to halt its rocket fire and Egypt to guarantee -- possibly through an international monitoring force -- that the Gaza-Egypt border will not be used for smuggling weapons. Egyptian President Hosni Mubarak has so far balked at the idea of monitors.

"At the end of the day, the key is in the hands of the Egyptians," Amidror said.

The Israeli air force has launched dozens of attacks on an extensive network of smugglers' tunnels between Gaza and Egypt, and military analysts say that sending ground troops to take the area could be a focus of the Israeli campaign's third phase.

For Gazans, the idea of another escalation is almost too much to bear. In addition to the dead, more than 3,600 Palestinians have been injured, and water, electricity, food and cooking gas have all been in short supply. International aid organizations have said that Gaza is in the midst of a humanitarian crisis.

Hashim Hassan, a 39-year-old pharmacist, said that Israel's offensive is only breeding extremism. "They're creating a new generation with even more hatred toward Israel," he said.

Israeli warplanes had dropped leaflets on Saturday warning that an escalation was likely and urging residents to flee. In Gaza, however, there is nowhere to go to escape the fighting. Nearly all areas of the coastal enclave have been touched by violence, and the borders are sealed shut.

On Sunday, doctors in Gaza hospitals reported that they had treated patients with severe burns consistent with possible exposure to white phosphorus, a chemical agent that can be used for illumination or to create smoke screens but that under the international laws of war is prohibited from use in densely packed urban areas. The doctors could not say definitively that white phosphorus was responsible for the injuries.

Human Rights Watch had charged on Saturday that Israel was using the substance, and its researchers described seeing Israeli artillery batteries firing it into the air above Gaza. The group demanded an end to the practice. White phosphorus, the group said, "can severely burn people and set structures, fields, and other civilian objects in the vicinity on fire."

The Israeli military would not directly address whether it has used white phosphorus in Gaza but said that it "uses weapons in compliance with international law."

The claims on both sides were difficult to verify. Foreign and Israeli journalists have not been permitted to enter Gaza since the war began, except in rare cases in the company of Israeli troops.