Israeli troops and Hamas fighters fought fierce street battles today as Israel tightened its stranglehold on Gaza City.

The most relentless battles of the 18-day conflict erupted when Israeli special forces backed by tanks and air strikes lunged ever deeper into several neighbourhoods in the south of Gaza's main city in the early hours of this morning.

Palestinian fighters fired back with roadside bombs, mortars and anti-tank rockets. Explosions, tank shell thuds and the rattle of gunfire kept terrified residents who had not yet fled the area awake all through the night.

“We are tightening the encirclement of the city,” Brigadier General Eyal Eisenbert, the commander of the operation, told a group of reporters briefly allowed in with the troops. “We are not static, we are careful to be constantly on the move."

The clashes come as the UN Security Council prepares to meet again on the crisis, after both Israel and Hamas ignored last week’s resolution calling for a halt to the fighting. There has been widespread speculation that Israel's leadership may soon approve a massive expansion of the offensive - a so-called "third phase" - despite talks in Egypt on ending the conflict.

Witnesses said that the Israeli tanks retreated shortly after dawn from the neighbourhoods of Tal al-Hawa and Sheikh Ajlin, but troops and armour remained camped in the outlying neighbourhood of Zeitun. Dozens of houses were damaged and some left in rubble by Israeli armour in the hours following the fighting.

At least 10 people were killed in today's clashes, medics said, while the army reported that one Israeli officer was critically wounded.

Israeli warplanes pounded the densely-populated coastal strip with more than 60 air strikes overnight, targetting rocket launching sites, weapons storage facilities, Hamas outposts and smuggling tunnels on Gaza’s border with Egypt, the army said.

Hamas and its allies sent four rockets and mortar rounds into Israel, with the projectiles not causing any injuries. The Islamists vowed they would emerge victorious, but said they were ready to examine truce initiatives.

“We are approaching victory,” Ismail Haniya, the Hamas leader, vowed in a rare television interview, adding that the Islamists were ready to “examine in a positive manner any initiative which can put an end to this aggression and the blood of our children being shed".

A Hamas delegation has been holding talks in Egypt on a Western-backed proposal by President Mubarak on how to end the fighting.

Israel and Hamas both ignored a UN Security Council resolution -- on which the United States abstained but which it backed in principle -- which called last week for a truce. Ban Ki-moon, the UN Secretary-General who is to head to the Middle East today, called on Israel and Hamas to immediately stop the fighting, saying that “too many people have died".

The Security Council was to hold closed-door consultations on the crisis later today.

The focus of peace efforts has been on an Egyptian proposal for an immediate ceasefire to allow humanitarian aid into impoverished Gaza, talks on opening Gaza’s border crossings and taking steps to prevent arms smuggling.

Ehud Olmert, the Israeli Prime Minister, yesterday reiterated Israel’s key demands -- stopping rocket fire and preventing Hamas from re-arming.

“If these two conditions are met, we will end our operation in Gaza,” he said. “Anything else will meet the iron fist of the Israeli people."

Salam Fayyad, the Palestinian Prime Minister whose remit is limited to the West Bank, said the Egyptian initiative offered the best hope of peace, putting pressure on both Israel and Hamas to respond positively. “He who refuses, voices reservations or moves slowly on this initiative bears the responsibility of explaining themselves, especially to the people of Gaza,” he said.

Aid agencies have warned of a growing humanitarian crisis in the territory, where the vast majority of the 1.5 million population depends on foreign aid and which is already reeling from months of a punishing Israeli blockade.

Since Israel unleashed its Operation Cast Lead on December 27, at least 930 people, including 277 children, have been killed and another 4,200 wounded, according to Gaza medics.

Ten Israeli soldiers and three civilians have been killed in combat or by rocket attacks in the same period and militants have fired some 700 rockets and mortars into Israel.

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