The dramatic escalation in the conflict between Israel and Hamas continued today, with the Israeli Army admitting to the killing a 12-year-old boy in a botched Gaza Strip air raid, prompting the Islamists to announce that there was no chance of a deal to release a kidnapped Israeli soldier it has held since 2006.

Following a new air raid targeting rocket-launching militants, the Israeli Army admitted it had accidentally killed Amir Yazagi, his father Mohammed and uncle Amr, who were travelling in a pick-up truck east of Gaza City.

The admission came as Israeli troops confirmed they had also killed Walid Obeidi, the top commander of Islamic Jihad, Hamas's sister group, in a pre-dawn raid on the village of Qabatiya, south of Jenin, in the West Bank.

It also came less than a day after a massive Israeli military operation killed 19 Palestinians, including the son of Mahmoud Zahar, the Hamas leader who masterminded the armed takeover of Gaza last summer which has left Hamas isolated by the international community.

In response to the raids, Hamas's leader in exile, Khaled Meshaal, today said there would be no prisoner exchange involving Gilad Shalit, who was captured in a Hamas raid in 2006. It was believed that Israel and Hamas had been indirectly negotiating a prisoner exchange, in talks mediated by Egypt, before the latest strike.

"I tell the...enemy. What you’re committing will deprive you of anything you’re betting on," he said, at a press conference in Damascus. "There will be no exchange involving Gilad Shalit, no calm or nothing of this sort."

In a statement, Major Avital Leibovich, an Israeli military spokeswoman, acknowledged that the Yazagi family’s vehicle was "unintentionally hit", adding that civilians were sometimes hurt when militants operated in densely populated environments. "It is important to me to stress that we have no intention whatsoever to hit or hurt uninvolved civilians," she said.

The Popular Resistance Committees, a small, Hamas-allied faction, said the intended target appeared to be its chief rocket-maker, who was driving in the area in a similar vehicle. Taher Nunu, a Hamas spokeswoman, called the strike "a new crime," saying Israel was "killing more and more of our innocent people and our freedom fighters."

The Islamists, who refuse to recognise Israel's right to exist or renounce terrorism, immediately increased the frequency of their rocket attacks against southern Israel's civilian communities, with an Israeli Army spokeswoman saying that 21 rockets and mortars were fired. No serious injuries or damage were reported. Residents of Sderot, a town of 20,000 that is a frequent target for the militants, stayed off the streets as sirens blared.

Despite his country's high-profile military action, it was over his peacemaking moves that Ehud Olmert, the Israeli Prime Minister, faced internal criticism today when a right-wing political party, Yisrael Beiteinu, pulled out of his already-fragile Government.

The decision by Avigdor Lieberman’s hardline party did not deliver a fatal blow to Mr Olmert’s administration, which still commands 67 of the Knesset parliament's 120 seats. But with other factions also making noises about quitting, and a potentially damning report on the conduct of the 2006 Lebanon War forthcoming, it places him under further pressure.

Explaining his decision to leave, Mr Lieberman said he was quitting the government after Israeli and Palestinian negotiators on Monday began tackling the core issues of their decades-old conflict - final borders, sovereignty over disputed east Jerusalem, and Palestinian refugees who lost homes in Israel during the war that broke out following the Jewish state’s creation in 1948.

"If we pull back to the 1967 borders, everyone should ask himself, what will happen the following day?" Lieberman asked. "Will the conflict stop, will the terror stop? Nothing will change."

Mr Olmert’s office released a statement saying: "There is no substitute for serious negotiations with a goal of achieving peace That is the order of the hour." The military this morning went ahead with threatened plans to dismantle two illegal Jewish settler outposts near Nablus, in the West Bank.

As tensions rose, President Bush completed his tour of the Middle East by giving a press conference in the Egyptian Red Sea resort of Sharm el-Shiekh, in which he continued to insist a deal could be signed by the time he leaves office in January, 2009.

"When I say I am coming back to stay engaged I mean it, and when I say I am optimistic we can get a deal done I mean what I am saying," he told reporters.

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