Israel is 'preparing to continue' its military action in Gaza despite a shaky ceasefire agreed last night, Benjamin Netanyahu has said.

The prime minister declared the battle was 'not over' after an alarming outbreak of violence across the Israel-Gaza border this weekend.

Hailing the success of Israeli air strikes which 'struck at terrorist leaders and destroyed terrorist buildings', Netanyahu said his military had hit Hamas, the rulers of Gaza, with 'great force'.

'The campaign is not over and it demands patience and good judgment,' the Israeli leader warned.

The air strikes - which killed at least two babies in Gaza - followed massive rocket fire from Gaza in the worst flare-up between Israel and the Palestinian militants since a 2014 war.

Egypt last night brokered a deal to stop the escalation, which left at least 29 people dead and threatened to widen into a new war.

Rescue: An injured boy is carried from an ambulance at a hospital in Beit Lahia in the Gaza strip, during violent exchanges between Israel and Gaza over the weekend

Palestinian leaders in Gaza agreed a ceasefire with Israel on Monday to end a deadly two-day escalation in violence that threatened to widen into war. Pictured is a man carrying the body of Palestinian child to a hospital following an Israeli airstrike in in the northern Gaza Strip

Israeli Prime Minister Benjamin Netanyahu (centre) warned Israel was 'prepared to continue' its military action after a two-day escalation with Gaza

Wreckage: A Palestinian girl stands in front of the rubble of a building that was destroyed during Israeli airstrikes on Gaza City

During the violent exchange, Israel's military said it had killed Hamed Ahmed Abed Khudari, a Hamas operative described as the group's 'money man'.

It was the first targeted killing of a Hamas leader by Israel's military since 2014, according to Israeli media.

President Donald Trump said he backed Israel '100 per cent in defense of its citizens' and condemned Gaza for its 'terrorist acts' against its Middle East neighbour.

Meanwhile Israel's former national security adviser Yaakov Amidror said the violence was being instigated from Iran.

The escalation began Saturday with massive rocket fire from Gaza, drawing waves of Israeli retaliatory strikes, and continued throughout Sunday.

Islamic Jihad, a group allied to Hamas, had warned that the violence 'could lead to an open war', according to Israeli media.

Israel warned it was making plans for a ground offensive and said the military had been 'given orders to prepare for a number of days of fighting'.

At least 25 Palestinians, including at least nine militants, were killed, while four civilians died in Israel.

Two of the bodies were discovered under rubble in the Gaza Strip on Monday.

Explosion: Smoke and debris are flung through the air in Gaza City yesterday after a building is hit by an Israeli airstrike

Debris: Palestinian youngsters gather among the rubble of a building that was destroyed during the two-day escalation across the Israel-Gaza border

The body of Palestinian man arrives at a hospital following an Israeli airstrike in Sheikh Zayed district, in the northern Gaza Strip on Saturday. At least 23 Palestinians and four civilians in Israel have been killed since Saturday

Flattened: The remains of a building that was destroyed by Israeli air strikes are seen in Gaza

The flare-up came as Hamas sought further steps from Israel toward easing its blockade under a previous ceasefire brokered by Egypt and the United Nations.

Israel faced pressure to seek to restore calm and put an end to the rocket fire hitting communities in the country's south.

It commemorates its Memorial and Independence Days later this week and is due to host the Eurovision song contest in Tel Aviv from May 14-18, which is expected to draw thousands to Israel.

On the Gazan side, the Muslim holy month of Ramadan is set to begin.

Palestinian officials in Gaza accused Israel of not taking steps to ease its blockade as promised under previous ceasefire deals.

The Islamic Jihad official said the new truce agreement was again based on Israel easing its blockade.

Victim: An injured Palestinian baby lies on a hospital bed in Beit Lahia in the north of the Gaza strip yesterday

Rubble: A Palestinian boy stands by a pile of debris on Monday as Palestinian and Israeli leaders agreed a ceasefire to pull back from the brink of war

Palestinian leaders in Gaza agreed a ceasefire with Israel on Monday to end a deadly two-day escalation in violence that threatened to widen into war

Smoke billows over Gaza City after Israel carries out an air strike in response to a barrage of rockets fired by Palestinian militants on Saturday

Among the steps, he said, were the relaxing of limits on fishing and improvements in Gaza's electricity and fuel situation.

Israel and Palestinian militants in Gaza have fought three wars since 2008 and the escalation brought them to the brink of another.

Sunday was particularly bloody, with 19 Palestinians and four civilians in Israel killed.

The Palestinian dead included a commander for Hamas's armed wing who Israel said it targeted due to his role in transferring money from Iran to militant groups in the Gaza Strip.

It was a rare admission of a targeted killing by Israel's army. Israeli Prime Minister Benjamin Netanyahu said on Sunday he instructed the military 'to continue its massive strikes on terror elements in the Gaza Strip.'

Hamas leader Ismail Haniya said in a statement on Sunday night that 'returning to a state of calm is possible' if Israel committed to a complete ceasefire.

Emergency: Paramedics push a stretcher carrying a wounded Palestinian man at a hospital in Beit Lahia, northern Gaza strip, on Sunday

Israel faced pressure to seek to restore calm and put an end to the rocket fire hitting communities in the country's south. Officers are seen inspecting damage to a home in Gaza on Saturday

lestinian children are seen seated in front of their house which is was destroyed during the Israeli air strikes in Gaza City on Sunday

Without it, 'the arena could face many rounds of confrontation,' he said.

Israel said its strikes were in response to Hamas and Islamic Jihad firing some 690 rockets or mortars across the border since Saturday, with Israeli air defences intercepting more than 240 of them.

In addition to those killed and injured, the rockets repeatedly set off air raid alarms in southern Israel and sent residents running to shelters while also damaging houses. At least 35 of the rockets fell in urban areas, according to the army.

The army said its tanks and planes hit some 350 militant targets in Gaza in response.

It targeted militant sites and in some cases militants themselves as well as their homes if they were found to be storing weapons, military spokesman Jonathan Conricus said.

Palestinians are seen inspecting the remains of a building which was destroyed during the Israeli air strikes in Gaza City during the week

Egyptian and UN officials held talks to reach a truce, as they have done repeatedly in the past, and there were international calls for calm

The Gaza health ministry said the dead from the Israeli strikes included a 14-month-old baby and a pregnant woman, 37. It first identified the woman as the baby's mother, but the family clarified on Sunday that she was the aunt.

Israel strongly disputed the claim, with Conricus saying that based on intelligence 'we are now confident' that the deaths of the woman and baby were not due to an Israeli strike.

'Their unfortunate death was not a result of (Israeli) weaponry but a Hamas rocket that was fired and exploded not where it was supposed to,' he said.

The Gazan ministry reported late Sunday that another four-month-old baby was among those killed in Israeli strikes in the northern Gaza Strip. Israel's army had no comment.

On Sunday, Hamas and Islamic Jihad said their armed wings had targeted an Israeli army vehicle with a Kornet missile.

Inspection: A Palestinian man checks the damage caused by Israeli airstrikes inside a buidling in Gaza City early on Monday

Conricus said a Kornet missile had hit a vehicle and killed an Israeli civilian. Egyptian and UN officials held talks to reach a truce, as they have done repeatedly in the past, and there were international calls for calm.

The escalation followed a gradual uptick in violence that threatened a previous ceasefire, including Friday clashes along the Gaza border that were the most violent in weeks.

A ceasefire between Israel and Hamas, brokered by Egypt and the United Nations, had led to relative calm around Israel's April 9 general election.

That truce saw Israel allow Qatar to provide millions of dollars in aid to Gaza, paying salaries and financing fuel purchases to ease severe electricity shortages.