UPDATE 1: Palestinian head accuses Israel of trying to 'wipe out' his people.
Israeli troops and Hamas fighters traded fierce gunfire on the streets of Gaza City Tuesday as Palestinian president Mahmud Abbas accused the Jewish state of trying to "wipe out" his people.
Israeli special forces backed by tanks and air strikes lunged ever deeper into the largest city in Gaza, advancing several hundred metres (yards) into several neighbourhoods in the south, witnesses and correspondents said.
The thuds of tanks shells and the rattle of gunfire had kept terrified residents awake overnight, although many had fled the area. Witnesses said the fighting was the most intense of the 18-day-old conflict.
The clashes come as Israeli media predicted that the country's leadership may approve an expansion of its massive offensive in Gaza despite ongoing talks in Egypt on how to end a war launched to stop rocket fire.
As Egypt pressed on with an initiative designed to bring about an immediate end to Israel's deadliest ever offensive in the impoverished strip of land, Abbas said the Jewish state appeared intent on waging a war of extermination.
"This is the 18th day of the Israeli aggression against our people, which is become more ferocious each day as the number of victims rises," Abbas said.
"Israel is keeping up this aggression to wipe out our people over there," he said at the opening of a meeting of the executive committee of the Palestine Liberation Organisation (PLO) in his base in the West Bank.
"Our people are holding up well. They continue to defend themselves and will never surrender."
The head of Israel's armed forces said Operation Cast Lead was making good progress but warned troops faced "complicated" conditions in Gaza City, home to more than half a million Palestinians where Israel has little experience of prolonged combat.
"We have already achieved a lot against both Hamas's infrastructure and its military wing but we still have work to be done," Chief of Staff Gabi Ashkenazi told lawmakers.
In a late night television address, Ismail Haniya, who heads the Hamas administration in Gaza, proclaimed that Israel had failed to break the will of Gaza and the Islamists were nearing victory.
The overall death toll from the conflict rose to at least 935, including 280 children. A further 4,260 have been wounded.
A Saudi jihadist who was fighting alongside Hamas was also among the latest fatalities, according to Islamist websites.
Three Israeli soldiers were wounded by an explosion in the north of the territory, one of whom was now in a critical condition, an army spokesman said.
Ten Israeli soldiers and three civilians have been killed in combat or by rocket attacks since December 27 when Israel began its offensive designed to put an end to rockets and mortars being fired from Gaza.
The tanks retreated shortly after dawn from the neighbourhoods of Tal al-Hawa and Sheikh Ajlin, allowing medics to rush into the area. However tanks and troops remained camped in the outlying neighbourhood of Zeitun.
Clashes between troops and fighters were also reported around the southern town of Khan Yunis.
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.
In his address, Haniya, who is not considered to wield influence over the group's armed wing, said 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 delegation from Hamas was to hold yet another round of talks with Egyptian intelligence chief Omar Suleiman on Tuesday on a Western-backed proposal drawn up by President Hosni Mubarak on how to end the fighting.
A senior official in Cairo indicated Egypt was getting increasingly frustrated at Hamas's response so far to its initiative.
"We're working seriously with Hamas, we need to end the vagueness and they need to say yes, now, to our plan," the Egyptian diplomat told AFP on condition of anonymity.
UN chief Ban Ki-moon, who is to head to the Middle East Tuesday, also called on Israel and Hamas to immediately stop the fighting, saying "too many people have died."
The Security Council was to hold closed-door consultations on the crisis later Tuesday.
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 that is already reeling from months of a punishing Israeli blockade.
Speaking on a tour of Gaza's main hospital, the president of the International Committee of the Red Cross (ICRC) said he had been saddened by what he had seen.
"I wanted to see this hospital and I can only say this is really very sad and it hurts a lot when you see what I've just seen," Jakob Kellenberger told reporters.