Israel is "prepared to escalate" its response to Palestinian rocket fire, Prime Minister Benjamin Netanyahu warned on Sunday, after one of the worst flare-ups along its border with Gaza in recent years.

"The army is acting and will act forcefully against the terror organisations in the Gaza Strip. They are receiving strong blows from the army," Netanyahu told ministers at the beginning of his cabinet meeting.

"The world must realise that Israel won't sit by idly in the face of attempts to attack us. We are prepared to escalate our actions," he said.

The flare-up began on Saturday evening when Gaza militants fired an anti-tank missile at an Israeli jeep along the Gaza border, injuring four soldiers, one of them severely. Three remained in hospital on Sunday.

Israel retaliated with airstrikes, shelling and artillery fire that left six Palestinians dead and 32 injured by Sunday morning, and Palestinian militants fired at least 57 rockets into southern Israel.

The latest barrage of rockets, on Sunday morning, hit the Israeli border town of Sderot, injuring four civilians, Israeli police said.

The outbreak of violence was one of the most serious since Israel's devastating 22-day operation in the Gaza Strip over New Year 2009, and raised the spectre of a broad Israeli operation against the Palestinian territory.

"It's a very severe situation, rockets are landing on our towns and villages, almost on a daily basis and of course no democratic country can tolerate such a thing," finance minister and Netanyahu confidant Yuval Steinitz said.

"If this will proceed, we will consider a much stronger and massive retaliation in order to protect our citizens."

The flare-up comes ahead of Israeli elections in January, but ministers said the build-up to the vote would not prevent an operation if it was necessary.

"Israel will have to prepare itself for an operation, whether or not elections (are scheduled)," infrastructure minister Uzi Landau said at the beginning of the cabinet meeting.

On Sunday morning, Palestinian medics said the death toll stood at six, after a militant was killed and two other people wounded in an Israeli air strike near the northern Gaza town of Jabaliya overnight.

The dead man was named as Mohammed Shwikani, a 20-year-old militant with the armed wing of Islamic Jihad, the group said.

Early on Sunday, medics reported finding the body of another Islamic Jihad militant, 20-year-old Mohammed Abed, who was killed in another air strike east of Jabaliya.

The Israeli military said it had attacked seven different targets overnight, including arms dumps, a weapons-making facility and two rocket-launching sites "in response to recent events."

Ashraf al-Qudra, spokesman for the Hamas-run health ministry, said 32 people had been injured, 10 of them requiring amputations. Medics said 10 people were in "serious to critical condition."

Qudra named the four civilians killed as 20-year-old Matar Abul Ata, 17-year-old Mohamed Harara, 15-year-old Ahmed Harara and 18-year-old Ahmed Dardasawy.

The violence prompted authorities on both sides of the border to close some schools, and in Gaza the Hamas government and militant groups vowed revenge.

"The occupation attacked Palestinian civilians east of Gaza City and Khan Yunis. We consider this escalation as very dangerous. It must stop immediately," said Hamas spokesman Fawzi Barhum.

The radical Popular Resistance Committees vowed that "the Zionist enemy will pay a high price for this crime against Gaza." And Islamic Jihad warned that "every aggression against the Palestinian people will be followed by a response from the resistance."

Tensions have been rising on the border since Thursday, when an Israeli soldier was wounded after explosives packed into a border tunnel were detonated in an attack claimed by Hamas's armed wing.

Several hours earlier, a 13-year-old Palestinian was shot dead by gunfire from an Israeli helicopter in the same area.

In December 2008, just six weeks before general elections, Israel launched a huge operation in Gaza against rocket fire, which killed 1,400 Palestinians -- half of them civilians -- and 13 Israelis, 10 of them soldiers.