Israel has vowed to escalate its response to an attack by the Palestinian militant group Hamas with a ground offensive.

Israel said dozens of its fighter jets struck more than 200 targets overnight on Wednesday in a neighbourhood of Gaza City that it said had been used by Hamas to launch its unprecedented wave of attacks.

Gaza's health ministry said at least 900 people have been killed and 4,600 wounded in the crowded coastal enclave.

Israel said it recaptured Gaza border areas from Hamas on Tuesday, the fourth day of fierce fighting that has left thousands dead on both sides since the militants launched a surprise attack.

Prime Minister Benjamin Netanyahu has warned Israel's military campaign following Saturday's onslaught is only the start of a sustained war to destroy Hamas and "change the Middle East".

The military said its forces had largely reclaimed the embattled south and the border around Gaza, and dislodged holdout Hamas fighters from more than a dozen towns and kibbutzim.

But late Tuesday in the southern Israeli city of Ashkelon, troops backed by helicopters and drones exchanged fire with several militants, leaving three fighters dead, the army said.

A new barrage of rockets was also fired from Gaza towards Ashkelon.

"Around 1,500 bodies of Hamas (fighters) have been found in Israel around the Gaza Strip," army spokesman Richard Hecht said earlier.

In Kfar Aza kibbutz, where Israeli forces say Hamas massacred more than 100 civilians, Israeli soldiers prepared to remove several of their compatriots in black body bags. 

On Saturday, Hamas gunmen from the Gaza Strip rampaged through parts of southern Israel, in the deadliest Palestinian militant attack in Israel's history.

Israel's military said the death toll in Israel had reached 1,200 and more than 2,700 people had been wounded.

"We have sustained extremely heavy casualties," military spokesperson Lieutenant Colonel Jonathan Conricus said in a video briefing on X, formerly known as Twitter.

The victims were overwhelmingly civilians, gunned down in homes, on streets or at an outdoor dance party. Scores of Israelis and others from abroad were captured and taken to Gaza as hostages, some shown on social media being paraded through the streets.

Hamas militants holding Israeli soldiers and civilians hostage on Monday threatened to execute a captive for each home in Gaza hit without warning, but as night fell on Tuesday there was no indication they had done so.

Israeli Defence Minister Yoav Gallant, speaking to soldiers near the Gaza fence, said: "Hamas wanted a change and it will get one. What was in Gaza will no longer be."

"We started the offensive from the air, later on we will also come from the ground. We've been controlling the area since Day 2 and we are on the offensive. It will only intensify."

Israel withdrew troops from Gaza in 2005 after 38 years of occupation, and has kept it under blockade since Hamas seized power there in 2007. The siege it announced on Monday would keep out food and fuel.

On Israel's northern border, a salvo of rockets was fired from southern Lebanon towards Israel, prompting Israeli shelling in return, three security sources said. 

More shells launched from Syrian territory landed in open areas in Israel, further raising fears that the violence could lead to a wider war.

"We do not yet know if these rockets were fired by the Syrian armed forces, by any of the many Iranian militias that exist and are welcomed by the Syrian regime, or Hezbollah or any other action," said Israel's Lieutenant Colonel Conricus. 

"What we do know is that we retaliated fire toward the sources of fire, and currently the situation there is quiet."

Sirens warning of incoming rocket fire blared overnight in Israeli communities near the Gaza border.

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