The casualties were the first in Israel since it launched its operation on Wednesday with the assassination of Hamas' top military commander, followed by an onslaught of airstrikes and shelling by tanks and naval gunboats. Eleven Palestinians, including two children and seven militants, have been killed and more than 100 wounded in Gaza since the Israeli operation began.
Few in the Palestinian territory's largest urban area, Gaza City, came out following the call for dawn prayers on Thursday, and the only vehicles plying the streets were ambulances and media cars.
About 400 angry mourners braved the streets, however, to bury Hamas mastermind Ahmed Jabari, whose body was draped in the green flag of the Islamic militant Hamas movement. Some fired guns in the air and chanted, "God is Great, the revenge is coming." When the body was brought into a mosque for funeral prayers, some tried to touch or kiss it. Others cried.
"This crime will not weaken us. It will make us stronger and more determined to continue the path of jihad and resistance," Hamas lawmaker Mushir al-Masri said in a eulogy. "The enemy opened the battle and shall bear the consequences."
Israel said Jabari's assassination was the start of a broader offensive, launched after days of rocket fire from the coastal territory. It was Israel's most intense attack on Gaza since its full-scale war there four years ago.
The fighting has deepened the instability gripping the Middle East. Egypt recalled its ambassador to protest the military operation.
Just days earlier, Israel was drawn into Syria's civil war for the first time, firing missiles into its northern neighbor for the first time in four decades after stray mortar fire landed in Israeli-occupied Syrian territory.
Israeli aircraft, tanks and naval gunboats resumed pounded Gaza early Thursday and about 60 rockets thudded into southern Israel as terrified residents on both sides of the frontier holed up in their homes.
Police spokesman Micky Rosenfeld said two Israeli men and a woman died after a rocket struck their four-story apartment building in the southern Israeli town of Kiryat Malachi. A 4-year-old boy was seriously wounded in and two babies lightly wounded in the strike.
Gaza schools were ordered closed until the operation ends, and most of the territory's 1.6 million people hunkered down close to home, venturing out only to buy food, fuel and other basic supplies.
Hamas announced a state of emergency in Gaza, evacuating all its security buildings and deploying its troops away from their locations.
Israeli aircraft dropped leaflets on several locations in Gaza early Thursday, warning Gazans to stay away from Hamas, other militants and their facilities.
The Israeli military said Hamas fighters and other militant factions, undeterred by the air attacks, bombarded southern Israel with more than 130 rockets after the operation began. Israel's newly deployed Iron Dome missile defense system, developed as a response to the short-range rockets from Gaza, intercepted two dozen of them, military spokeswoman Lt. Col. Avital Leibovich said.
Israel declared a state of emergency in the country's south, where more than 1 million Israelis live within rocket range, instructing people to remain close to fortified areas. School was canceled in communities within a 40-kilometer (25-mile) radius of Gaza.
People living in areas along the frontier were ordered to stay home from work, save for essential services, and shopping centers were closed. Israeli police stepped up patrols around the country, fearing Hamas could retaliate with bombing attacks far from the reaches of Gaza.
Batya Katar, a resident of Sderot, a community that has been a frequent target of rocket fire, said streets were empty there.
"People won't be outside. The minute they assassinated the Hamas military chief we knew an offensive had begun. We were waiting for it, and it's about time they did it. We have the right to live like other countries in the world."
Israeli officials said Wednesday that a ground invasion was a strong possibility in the coming days if Hamas didn't rein in the rocket fire. Mid-morning Thursday, there was no sign such an invasion might be beginning. But the Israeli military was cleared to call up special reserve units -- a sign the operation might broaden.
The military said it destroyed dozens of the militants' most potent rockets -- the Iranian-made Fajr, which is capable of striking Israel's Tel Aviv heartland -- as well as shorter-range rockets. In all, the military estimated Hamas had 10,000 rockets and mortars in its arsenal before the military operation began.
In a nationwide address Wednesday, Prime Minister Benjamin Netanyahu said Israel could no longer stand repeated attacks on its southern towns.
"If there is a need, the military is prepared to expand the operation. We will continue to do everything to protect our citizens," Netanyahu declared late Wednesday.
For the past four years, Israel and Hamas have largely observed an informal truce. But in recent weeks, the calm has unraveled in a bout of rocket attacks from Gaza and retaliatory Israeli airstrikes. From Israel's perspective, Hamas escalated the situation with two specific attacks in recent days: an explosion in a tunnel along the Israeli border and a missile attack on an Israeli military jeep that seriously wounded four soldiers.
Earlier this week, Israeli defense officials warned they were considering resuming their controversial practice of assassinating senior militants. Wednesday's killing of Jabari was an indication they were serious.
Israel has refrained from such attacks, which have drawn international condemnations, since its January 2009 offensive in Gaza.
Hamas officials had brushed off the Israeli threats, and Jabari, contrary to form, was driving in broad daylight when his vehicle was hit.
The Hamas military chief had long topped Israel's most-wanted list, blamed for masterminding a string of deadly attacks that including a bold, cross-border kidnapping of an Israeli soldier in 2006. He also was believed to be a key player in Hamas' takeover of Gaza in 2007 from a rival Palestinian faction, the Western-backed Fatah movement.
Meanwhile, Palestinian President Mahmoud Abbas cut short a trip to Switzerland to deal with the crisis. Abbas was rushing back to his base in the West Bank, said Palestinian official Saeb Erekat.
Abbas lost control of Gaza to Hamas militants in 2007 and now governs only the West Bank. Still, he claims to be president of all Palestinians.
Erekat harshly condemned Israel's military operation, saying the Palestinians "hold Israel fully responsible for the consequences of this act of aggression."
Advocates say targeted killings are an effective deterrent without the complications associated with a ground operation such as civilian and Israeli troop casualties, and that they also prevent future attacks by removing the masterminds. Critics say they amount to extrajudicial killings and invite retaliation by militants and encourage them to try to assassinate Israeli leaders.
During a wave of suicide bombings against Israel a decade ago, the country employed the tactic to eliminate the upper echelon of Hamas leadership.
Hamas accused Netanyahu of launching Wednesday's operation to win votes in the Jan. 22 parliamentary election. But major Israeli parties, including the dovish opposition, all lined up behind Netanyahu.
Still, the region has changed greatly since the Gaza offensive four years ago. Neighboring Egypt is now governed by Hamas' ideological counterpart, the Muslim Brotherhood.
Israel and Egypt signed a peace accord in 1979. Relations, never warm, deteriorated after longtime Egyptian President Hosni Mubarak was ousted in a popular uprising last year. The Jabari assassination threatened to further damage those fraying ties.
In Washington, the United States lined up behind Israel. "We support Israel's right to defend itself, and we encourage Israel to continue to take every effort to avoid civilian casualties," said State Department spokesman Mark Toner.
President Barack Obama spoke with Netanyahu and the two men agreed Hamas needs to stop its attacks on Israel to allow tensions to ease, the White House said.
Obama spoke separately to Egyptian President Mohammed Morsi, given Egypt's central role in preserving regional security, the White House said. The two men agreed on the need to de-escalate the conflict as quickly as possible.
U.N. Secretary-General Ban Ki-moon called for calm and urged both sides to respect international humanitarian law.
On Wednesday night, the U.N. Security Council met behind closed doors to consider an Egyptian request for an emergency meeting on Israel's military action in Gaza. The Palestinians asked the council to act to stop the operation.