ISRAELI troops battled Hamas militants near a town in the southern Gaza Strip town as American Secretary Of State John Kerry reported progress in efforts to broker a truce.
Trapped by an escalation of fighting in Khan Younis, a town on the edge of the Gaza Strip, dozens of Palestinian families scrambled to flee the area.
Mr Kerry flew into Tel Aviv despite a US ban on flights following a Hamas rocket that hit near the airport earlier this week, reflecting his determination to achieve a ceasefire agreement between the warring sides.
He met Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas in a crucial day in the faltering talks.
American officials have downplayed expectations for an immediate, lasting truce between Israel and Hamas, the militant group that controls Gaza.
Mr Kerry said negotiations towards a ceasefire were making some progress after days of a deadly impasse between the two warring sides.
He was not specific in describing what he called steps forward in the negotiations as he met United Nations Secretary-General Ban Ki-moon for the second time this week.
Mr Kerry said: "We certainly have made steps forward. There is still work to be done."
The conflict has so far killed at least 657 Palestinians, said to be mostly civilians, and 31 Israelis.
A foreign worker in Israel was also killed when a rocket fired from the Gaza Strip landed near the southern city of Ashkelon.
Israel said two more soldiers had died in the conflict, bringing the military's death toll to 29, but did not elaborate on the circumstances of the latest casualties. Two Israeli civilians have died in the 15-day fighting.
A Palestinian health official said eight Hamas fighters were killed in the battle near Khan Younis, from where the Palestinian Red Crescent was trying to evacuate about 250 people. Khan Younis came under Israeli tank shelling and drone strikes from yesterday morning.
The Red Crescent said Hamas fighters in the area were deploying rocket propelled grenades and light weapons, including machine guns, against the Israelis.
Hundreds of residents of eastern Khan Younis were seen fleeing their homes as the battle unfolded, flooding into the streets with what few belongings they could carry, many with children in tow. They said they were seeking shelter in nearby UN schools.
The fighting was centred on an agricultural area, which Israel has claimed is a site for Hamas tunnels going under the border into Israel.
The Palestinians say Israel is randomly deploying a wide array of modern weaponry against Gaza's 1.7 million people, inflicting a heavy civilian death toll and destroying large amounts of property.
Israel says it began the Gaza operation to halt Hamas rocket fire into Israel - more than 2,100 have been fired since the conflict erupted - and to destroy a network of tunnels leading from Gaza to Israel that are intended to allow Hamas militants to carry out attacks against Israelis.
As the death toll mounted, a 34-year-old Palestinian man was killed in clashes with Israeli soldiers near the West Bank city of Bethlehem, a potentially ominous development in an area that has so far been relatively free of violence.