Palestinian militants in the Gaza Strip have fired almost 300 rockets at Israel and the Israeli military says it has hit 50 Islamic Jihad targets, in the heaviest fighting in nine months.
Six people have been killed and 45 injured in Gaza, local medics say.
Several were hurt rushing to shelters in Israel, where most rockets have been intercepted or fell in open areas.
It comes a day after 15 Palestinians were killed in Israeli strikes on Gaza, including three Islamic Jihad leaders.
Islamic Jihad, which is the second biggest militant group in the territory after Hamas, had sworn to avenge their deaths.
Egyptian media reported on Wednesday evening that Egypt had brokered a ceasefire, but there was no immediate confirmation from the two sides. Soon afterwards, another rocket barrage was fired towards southern Israel and there were further strikes in Gaza.
An umbrella organisation representing armed factions in Gaza earlier warned that “if Israel increases its aggression, dark days await it”.
Israel’s Prime Minister Benjamin Netanyahu told mayors that it was “ready for the possibility of an expanded campaign and harsh strikes against Gaza”.
Palestinians said the exchange of fire began with several loud explosions in southern Gaza, sending up large plumes of smoke.
The Israel Defense Forces (IDF) said an aircraft targeted Islamic Jihad operatives travelling in a vehicle to a concealed rocket launcher in the Khan Younis area.
About an hour later, the IDF announced that it had started attacking underground rocket launchers belonging to Islamic Jihad across the territory in order to thwart planned attacks.
Palestinian media reported strikes in and around Gaza City, in the southern town of Rafah, and in the northern towns of Beit Lahiya and Beit Hanoun.
The Palestinian health ministry in Gaza reported that one person was killed in the initial Israeli strike in Khan Younis, and that five others were killed in subsequent strikes in the north and south of the Strip.
Four of those killed were members of the military wing of the Popular Front for the Liberation of Palestine, the group said.
A 10-year-old girl was also killed in Gaza City in unclear circumstances.
As Israeli aircraft struck Gaza, militants began firing barrages of rockets from Gaza and rocket sirens sounded in communities in southern Israel.
Later, rockets were launched towards central Israel, triggering sirens in the Tel Aviv area, 80km (50 miles) from Gaza. In one video filmed in Old Jaffa, explosions could be heard as two rockets appeared to be intercepted overhead.
Israeli officials said one rocket hit an empty house in the town of Sderot, which is only 1km (0.6 miles) from the Gaza perimeter fence. Another hit the roof of a kindergarten in the kibbutz of Nirim, to the south, but no-one was injured.
A hospital in the city of Ashkelon said it treated eight people hurt while running to a bomb shelter and three other people for anxiety.
The IDF said 212 of the 289 rockets launched from Gaza crossed into Israeli territory, while the other 56 fell inside Gaza.
Israel’s Iron Dome air defence system intercepted 60 rockets, three hit urban areas in Israel and the rest landed in open areas.
The IDF also said it had carried out strikes on more than 50 sites belonging to Islamic Jihad in Gaza, including rocket and mortar launchers.
The Joint Operations Room of armed groups in Gaza, which includes Islamic Jihad and Hamas, claimed in a statement that they had launched the rockets.
“The damage to the homes of civilians and faction fighters is a red line, and we will respond strongly to it. Resistance forces are ready for all options,” it said.