ISRAEL has claimed that militants fired rockets from Gaza in violation of a truce, and that it struck back with attacks in the Palestinian enclave.
The fresh fighting has put talks in Cairo on a long-term ceasefire in jeopardy.
An Israeli official said Prime Minister Benjamin Netanyahu ordered his negotiating team in Egypt to return home.
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However, there was no word from Israel on whether the move spelled the collapse of indirect talks with the Palestinians on ending the Gaza war and charting the territory's future.
Three rockets struck southern Israel, near the city of Beersheba, the military said, nearly eight hours before a ceasefire - extended by a day on Monday - was due to expire.
There was no immediate claim of responsibility for the attack, which the military said caused no casualties or damage. Sami Abu Zuhri, a spokesman for Hamas, the dominant movement in the Gaza Strip, said it had no knowledge of any rockets being fired.
Mr Netanyahu's spokesman Mark Regev said: "This rocket attack was a grave and direct violation of the ceasefire."
A military spokesman said that, in response, "terror targets across the Gaza Strip" were attacked. Hospital officials said two children in Gaza were wounded and the Israeli attacks spurred a new exodus of Palestinian families who had fled previous fighting and returned only days ago.
Egyptian mediators have been struggling to end the five-week-old Gaza conflict and seal a deal that would open the way for reconstruction aid to flow to the territory of 1.8 million people, where thousands of homes have been destroyed.
The Palestinians want Egypt and Israel to lift their blockades of the economically-crippled Gaza Strip that predated the Israeli offensive launched on July 8 after a surge in cross-border rocket fire by Hamas.
The Palestinian Health Ministry put the Gaza death toll at 2,016 and said most were civilians in the small, densely populated coastal territory. Israel has said it killed hundreds of Gaza gunmen in the fighting. Sixty-four Israeli soldiers and three civilians in Israel have been killed.
Before the latest flareup, Azzam al Ahmad, senior leader of President Mahmoud Abbas's Fatah movement, said there had been "no progress on any point" in the negotiations, in which Israel has said ensuring its security was its paramount concern.
Earlier, in Cairo, the chief Palestinian delegate to the indirect negotiations with Israel said violence could erupt again if the talks failed.
Israel, like Egypt, views Hamas as a security threat and wants guarantees any removal of border restrictions will not result in militant groups obtaining weapons
Mr Ahmad said before hostilities resumed: "We hope every minute of the coming 24 hours will be used to reach an agreement, and if they are not (successful) the circle of violence will continue."
A senior Palestinian official in Gaza said sticking points to an agreement in the Cairo talks have been Hamas's demands to build a seaport and an airport, which Israel wants to discuss only at a later stage.
Israel has called for the disarming of militant groups in the enclave.
Hamas has said that laying down its weapons is not an option and has blamed Israel for talks faltering.