GAZA (Reuters) - Israel called off its three-week offensive in the Gaza Strip on Saturday, saying Hamas was “badly beaten,” but the Islamist group vowed to fight on in a war that has killed 1,200 Palestinians in the coastal enclave.

Within minutes of Prime Minister Ehud Olmert announcing that a unilateral ceasefire would start three hours later at 2 a.m. (0000 GMT) on Sunday, several missiles struck southern Israel.

“Conditions have been created whereby the goals set at the launch of the operation have been more than fully achieved,” Olmert said in a televised address from army headquarters.

He said Hamas’s ability to fire rockets at southern Israeli towns also had been severely limited.

Olmert also cited what he described as internationally-backed understandings with Egypt, the Gaza Strip’s southern neighbor, on preventing Hamas, which has smuggled in rockets through tunnels under the border, from rearming.

After 22 days of war that has killed hundreds of civilians, many of Gaza’s 1.5 million people are desperate for a respite.

But Hamas officials said that until Israeli forces withdrew from the territory and agreed to end a long blockade that has crippled Gaza’s economy, they would not hold their fire.

“A unilateral ceasefire does not mean ending the aggression and ending the siege,” spokesman Fawzi Barhoum said. “These constitute acts of war so this won’t mean an end to resistance.”

But Olmert said the troops would remain in place and hit back if the Palestinians tried to fight on: “If our enemies decide the blows they’ve been dealt are not sufficient and they are interested in continuing the fight, Israel will be prepared for such and feel free to continue to react with force.”

Slideshow ( 14 images )

U.N. Secretary General Ban Ki-moon hailed the ceasefire but also urged Israel to pull out its forces from Gaza rapidly.

Slideshow ( 14 images )

EGYPTIAN DIPLOMACY

Olmert said the ceasefire plan responded to an appeal from Egyptian President Hosni Mubarak, who has been at the spearhead of international diplomatic efforts to end the conflict.

But Olmert, who will be stepping down soon after a February 10 election, Israel chose to shun a negotiated accord with Hamas and to simply hold its fire, denying the Islamists, who are committed to the destruction of the Jewish state, the deal they sought on easing Israel’s punitive blockade on the territory.

Hamas’s Barhoum called it “an attempt to pre-empt the Egyptian efforts ... that seek to achieve a withdrawal of the occupying forces, an end to the siege and a ceasefire.”

Olmert indicated he expected an end to combat: “The campaign has proven Israel’s power and strengthened its deterrence.”

He also said he would work with Mubarak to tighten security on Gaza’s Egyptian border -- a key goal of Israel which wants to prevent Hamas rearming through smuggling tunnels.

Despite the lack of any clear deal at this stage, Mubarak invited a pack of European leaders to a short-notice summit on Sunday that is meant to come up with ways to bolster the truce in Gaza and to ease the plight of the civilian population crammed into the 45-km (28-mile) sliver of coast.