The bloodshed comes amid a renewed push for peace and rising expectations that outgoing British Prime Minister Tony Blair will be named special envoy by the international Quartet pushing to resolve the Middle East conflict.

Israeli tanks and bulldozers rolled into Gaza City and the southern town of Khan Yunis in incursions launched overnight that swiftly sparked clashes with Palestinian fighters armed with guns and rocket-propelled grenades.

An air strike was called in near the Karni crossing between Gaza and Israel after gunmen were spotted approaching Israeli forces in the area.

The army said the activity was against "terror threats" in Gaza, where Hamas fighters overran security forces loyal to Western-backed Palestinian president Abbas on June 15, effectively creating an Islamic enclave on Israel's doorstep.

Medics said 11 Palestinians were killed, including eight fighters in the armed Islamic Jihad, Hamas and the Al-Aqsa Martyrs Brigades linked to Abbas's Fatah party. Three civilians were killed, including a 12-year-old boy.

An Apache gunship helicopter swooped to the sound of heavy shooting and periodic explosions in eastern Gaza City while Israeli soldiers patrolled rooftops and Palestinian fighters ran through the streets, witnesses said.

At least 40 Palestinians and two Israeli soldiers were injured.

"We have a number of gunmen who were identified by our forces there (in Shujaiya area) and fired at in different incidents," an army spokesman said before the operation in eastern Gaza City ended and Israeli soldiers withdrew.

In the south, two fighters from the Al-Quds Brigades and Hamas's armed Ezzedine al-Qassam Brigades were killed in clashes with Israelis in Khan Yunis.

"In the southern Gaza Strip, Palestinians fired anti-tank missiles and opened fire at the IDF forces there which are operating against terror threats. During exchange of fire, the force identified hitting two," the army said.

The violence came as envoys pressed a diplomatic agenda after Abbas met Israeli Prime Minister Ehud Olmert face-to-face at a regional summit at Sharm el-Sheikh in Egypt on Monday for the first time since the Hamas seizure of Gaza.

Abbas condemned the Gaza operations at a news conference with visiting Russian Foreign Minister Sergei Lavrov in the West Bank capital of Ramallah.

"We strongly condemn this criminal action," he said while Hamas lashed out at the "barbaric massacre" and the "first bloody fruit of Sharm el-Sheikh."

Olmert told the four-way summit with Egypt and Jordan he was prepared to free 250 prisoners from Abbas's Fatah party and that Israel would pass on tax money collected on behalf of the Palestinians.