Israeli fire killed at least 43 Palestinians in the Gaza Strip early on Wednesday as the Jewish state said it targeted militants at dozens of sites across the coastal enclave, while Egyptian mediators prepared a revised ceasefire proposal.

Israel's Channel Two TV said progress was being made to achieve a deal in Cairo, where a Palestinian delegation was expected to arrive for discussions.

Israeli tank shells and air strikes on houses and a school in Jebalya in northern Gaza killed at least 43 people and wounded many others, including 20 in a UN school, health ministry spokesman Ashraf Al-Qidra said. Among the dead were a medic and an infant.

An Israeli army spokeswoman said she was checking for details.

Eight people, including five members of the same family in Jebalya, were killed in other strikes, Gaza officials said.

Hospital officials put the total number of Palestinians killed in the conflict at 1,224, most of them civilians. On the Israeli side, 53 soldiers and three civilians have been killed since the start of the offensive on July 8.

Israel launched its offensive in response to rocket salvoes fired by Gaza's dominant Hamas Islamists and their allies.

UNRWA, the main U.N. relief agency in Gaza, said it was at "breaking point" with more than 200,000 Palestinians having taken shelter in its schools and buildings following calls by Israel for civilians to evacuate whole neighbourhoods before military operations.

The agency acknowledged that it had found a cache of rockets in one school. but blamed no particular party. The body's spokesman, Chris Gunness, condemned those responsible for placing people in harm's way.

"We condemn the group or groups who endangered civilians by placing these munitions in our school. This is yet another flagrant violation of the neutrality of our premises. We call on all the warring parties to respect the inviolability of U.N. property." Gunness said in a statement.

The Israeli assault intensified after the deaths of 10 soldiers in Palestinian cross-border attacks on Monday. Prime Minister Benjamin Netanyahu warned of a long conflict ahead.

The security cabinet convenes again on Wednesday to assess the situation in the conflict and consider future steps.

The army said it needed about a week to complete its main mission of destroying cross-border infiltration tunnels and there has been strong Israeli public support for holding course.

Diplomatic pressure also mounted, with Chile and Peru saying they were recalling their ambassadors to Israel.

Chile, a non-permanent member of the United Nations Security Council, is home to one of the world's largest Palestinian communities outside the Middle East, as well as a sizeable Jewish community.

"Chile observes with great concern and discouragement that the military operations - which at this point appear to be a collective punishment to the Palestinian civil population in Gaza - don't respect fundamental norms of international humanitarian law," its foreign ministry said.

In a bid to boost Palestinian spirits and demoralise Israel, Hamas TV aired footage it said showed the group's fighters using a tunnel to reach an Israeli army watchtower on Monday. They are seen surprising an Israeli sentry, opening fire and storming the watchtower compound to surround a fallen soldier.

Mohammed Deif, the shadowy leader of Hamas's armed wing, said in a recorded message on television that Palestinians would continue confronting Israel until its blockade on Gaza - which is supported by neighbouring Egypt - was lifted.

"The occupying entity will not enjoy security unless our people live in freedom and dignity," Deif said. "There will be no ceasefire before the (Israeli) aggression is stopped and the blockade is lifted. We will not accept interim solutions."

ISRAEL DEMANDS DISARMAMENT

Israel has baulked at freeing up Gaza's borders under a de-escalation deal unless Hamas's disarmament is also guaranteed.

Egypt said on Tuesday it was revising an unconditional truce proposal that Israel had originally accepted but Hamas rejected, and that the new offer would be presented to a Palestinian delegation. An Israeli official said Israel might send its own envoy to Cairo.

"We are hearing that Israel has approved a ceasefire but Hamas has not," an Egyptian official told Reuters, an account that the Netanyahu government neither confirmed nor denied.

The U.S.-backed administration of Palestinian President Mahmoud Abbas in the Israeli-occupied West Bank voiced support on Tuesday for a 24-72 hour ceasefire. It said it was also speaking for Hamas and Islamic Jihad in the Gaza Strip.

Hamas spokesman Sami Abu Zuhri disputed that statement but confirmed there were "intensive, ongoing contacts" on a truce.

Few Israelis want the operation to end now.

A Tel Aviv University poll published on Tuesday found 95 percent of Israel's Jewish majority felt the offensive was justified. Only 4 percent believed too much force had been used.

Both U.S. President Barack Obama and the U.N. Security Council have called for an immediate ceasefire to allow relief to reach Gaza's 1.8 million Palestinians, followed by negotiations on a more durable end to hostilities.

Efforts led by U.S. Secretary of State John Kerry last week failed to achieve a breakthrough, and the explosion of violence appeared to dash international hopes of turning a brief lull for the Muslim Eid al-Fitr festival into a longer-term ceasefire.

Hamas preaches the Jewish state's destruction, but has been open to long-term ceasefires. Since it is shunned by the United States and Israel as a terrorist group, Kerry's mediation has been facilitated by Egypt, Turkey, Qatar and Abbas.

POWER STATION KNOCKED OUT

Thick black smoke rose from blazing fuel tanks at Gaza's only power station which Israel knocked out on Tuesday. Officials said the plant could be out of action for a year.

Power was cut to the city of Gaza and other parts of the territory after what officials said was Israeli tank shelling of the tanks containing 3 million litres of diesel fuel.

"The power plant is finished," said its director, Mohammed al-Sharif. An Israeli military spokeswoman had no immediate comment and said she was checking the report.

Palestinians launched 54 rockets towards southern and central Israel, including the Tel Aviv and Jerusalem area, on Tuesday, the military said. Five were shot down by Iron Dome interceptors while the rest fell wide, causing no damage.  – Reuters