Israel vowed on Monday to keep hitting Gaza even as troops pulled out of the Hamas-run territory after clashes that killed at least 120 Palestinians and dealt a major blow to Middle East peace talks.

"We are not prepared to show any tolerance, period. And we will respond. Our reaction is not limited to a specific operation or day," Olmert told a meeting of his Kadima party in Jerusalem.

"The operation will not end before we achieve our goals and our first goal is a significant reduction of Qassam and Grad rocket fire against Israeli civilians," he said, referring to two types of rockets used by Gaza militants.

In northern Gaza, residents ventured from their homes to pick through the rubble after the deadliest Israeli military blitz on the territory in years.

"My whole life I have never seen massacres like this," cried Aisha Abid Rabah, 82, raising her hands to the sky as she sat on a demolished door in the northern town of Jabaliya that bore the brunt of the Israeli strikes.

The bloody assault earned Israel international condemnation and caused moderate Palestinian president Mahmud Abbas to cut contacts with the Israelis, though on Monday he reiterated his willingness to seek a truce.

Meanwhile US Secretary of State Condoleezza Rice departed for the region in her latest bid to boost peace efforts which have been stalled since the two sides formally relaunched peace talks at a US conference in November.

Since a dramatic escalation in violence last Wednesday, 120 Palestinians, including 22 children and dozens of militants, have been killed, according to Gaza health ministry statistics. More than 350 were wounded.

Two Israeli soldiers were also killed in the clashes and one Israeli civilian died in a rocket attack launched by Gaza militants.

Israel launched the operation on Saturday in a bid to stop near-daily rocket fire from Gaza, where the Islamist Hamas movement -- which is sworn to Israel's destruction -- seized power in June by routing pro-Abbas forces.

But as has been the case with previous Israeli operations, this one failed to halt the rocket fire -- two projectiles fell in the coastal city of Ashkelon on Monday, slightly wounding one woman, medics said.

A senior military intelligence official told parliamentarians that over 20 Katyusha-type rockets -- also known as Grad -- were fired from Gaza since Thursday.

Gaza militants have in recent years fired thousands of short-range makeshift rockets and mortars against southern Israel, but only rarely fired the longer range and more powerful 122-milimetre Grad.

Israel believes that over 100 Grads were smuggled into Gaza through its porous border with Egypt in recent months, and on Monday the army claimed that all the long-range rockets fired at Israel in recent days were Iranian-made.

Hamas, which admitted to losing some three dozen fighters in the clashes, held a victory march in Gaza City claiming victory over Israeli forces.

The violence in and around Gaza sharply escalated early on Wednesday when an Israeli air raid killed five Hamas militants and Hamas responded with a barrage of rockets, one of which killed a civilian in southern Israel.

It was the first such death since May 2007. Rocket fire has killed 14 civilians inside Israel since 2000.

The clashes peaked on Saturday when Israel sent a regiment of ground troops into the northern town of Jabaliya in an operation dubbed "Hot Winter" that killed 77 Palestinians in two days.

Olmert stressed that Israel was nevertheless still committed to peace talks as a way to avoid the radicalisation of the occupied West Bank where Abbas still holds power.

The two sides have made almost no progress in the three months since they relaunched talks in the United States because of deep divisions over the core issues of their decades-old conflict.

At least 321 people have been killed in Israeli-Palestinian violence since the conference, most of them in Gaza, according to an AFP tally.

The aftermath of the violence will present a challenge for Rice, who is due to arrive in the region on Tuesday for talks with Israeli and Palestinian leaders in her latest bid to advance the halting peace talks.

Meanwhile, Egypt's powerful head of intelligence Omar Suleiman put off a trip to Israel in protest at "the Israeli escalation" in Gaza, Egyptian state media reported on Monday.