Israeli tanks blasted their way into the southern Gaza city of Khan Yunis for the first time this morning, Palestinian witnesses said, as heavy fighting raged on the northern edges of Gaza City itself.

As Israeli forces move deeper into Hamas-controlled cities and shanty towns, where hundreds of thousands of impoverished Gazans are struggling to get by without electricity, running water or adequate food supplies, they are paying an increasingly heavy price. Three soldiers were killed and 30 wounded in a “friendly fire” incident, when the building they were occupying was hit by one of their own tanks.

Israel said it had killed 130 Hamas fighters since launching its ground offensive on Saturday night, as the Islamist guerrillas fought pitched street battles using mortars, rockets grenades and small arms.

The Israeli offensive has created a swath of destruction and death as the armoured columns push into heavily populated shanty towns populated by refugees of previous wars and their descendents.

Facing them are up to 15,000 Hamas fighters, who have been waiting for just such a battle on the ground of their choosing: booby-trapped alleys filled with tunnels they have dug to outmanoeuvre the Israelis, and primed with booby traps.

The Israeli army did not immediately confirm that its forces had pushed into Khan Yunis, a sprawling city that was the scene of constant clashes with the Gush Khatif settlement bloc that occupied the nearby coast until the Israeli withdrawal in 2005.

Israeli analysts were warning that Operation Cast Lead, which started with a week-long aerial blitz that killed hundreds of Palestinians, could be nearing a decisive phase. The government and top brass have to decide whether to escalate the battle by moving into the dangerous urban landscape of Gaza City, home to 400,000 people, or accept one of the ceasefire proposals being forwarded by the international community.

Both sides have so far refused a truce, with Israel pushing deeper into Gaza and Hamas firing more missiles at southern Israel this morning.

Nicolas Sarkozy, the French President, and a high-level EU delegation are touring the region to press for an end to hostilities as UN and aid agencies say that food, power, water and medicine are at dangerously low levels. The population was already living on the very basics after months of Israeli closure of the strip, which has declared a “hostile entity since Hamas took control by force in June 2007.

Hamas refuses to recognize Israel’s right to even exist, though its more moderate wing has offered a long-term ceasefire.

Hamas leaders were in fighting mood yesterday, breaking cover despite Israeli bombers swooping over Gaza to try and kill them, in order to send messages threatening yet more bloodshed.

Mahmoud Zahar, the hardline political leader believed to have been a driving force behind Hamas’ summer war with mainstream rivals Fatah in 2007, promised to repay Israel in kind for the killing of more than 100 Palestinian children in the latest offensive.

“They have legitimised the murder of their own children by killing the children of Palestine,” he said in a televised broadcast recorded at a secret location. “They have legitimised the killing of their people all over the world by killing our people.”

Abu Obeida, the leader of Hamas’s military wing, also made his first appearance on Gaza television, his face masked in a red and white scarf, to goad Israeli forces massed outside the Gaza City “We have prepared thousands of brave fighters who are waiting for you in each corner of the street and will welcome you with fire and iron,” he said.

A spokesman for Islamic Jihad, a smaller but even more fanatical faction than Hamas, said his men were outflanking the encroaching Israeli forces.

"A Jihad unit is taking part in the clashes with Israeli soldiers in eastern Gaza. They attacked the rear lines" of the Israeli forces…Communications with our fighters are cut at the moment but it is still going on."

In central Gaza, in the town of Deir al-Balah, four Hamas gunmen and two Islamic Jihad fighters died when the house they were in was hit by Israeli tank fire, witnesses said.

And in the southern town of Rafah, on the Egyptian border, witnesses said an elderly woman was killed by an Israeli air strike. At least 18 people have been killed so far this morning, Palestinian medics said.

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