An Israeli minister today warned of increasingly bitter conflict in the Gaza Strip, saying the Palestinians could bring on themselves what he called a "holocaust".

"The more Qassam [rocket] fire intensifies and the rockets reach a longer range, they will bring upon themselves a bigger shoah because we will use all our might to defend ourselves," Matan Vilnai, Israel's deputy defence minister, told army radio.

Shoah is the Hebrew word normally reserved to refer to the Jewish Holocaust. It is rarely used in Israel outside discussions of the Nazi extermination of Jews during the second world war, and many Israelis are loath to countenance its use to describe other events.

The minister's statement came after two days of tit-for-tat missile raids between Hamas militants in the Gaza Strip and the Israeli army. At least 32 Palestinians and one Israeli have been killed since the surge in violence on Wednesday.

Today Israel activated a rocket warning system to protect Ashkelon, a city of 120,000 people, from Palestinian attacks.

Ashkelon was hit by several Grad rockets fired from Gaza yesterday. One hit an apartment building, slicing through the roof and three floors below, and another landed near a school, wounding a 17-year-old girl.

Located 11 miles from Gaza, Ashkelon has been sporadically targeted before but not suffered direct hits or significant damage.

"It will be sad, and difficult, but we have no other choice," Vilnai said, referring to the large-scale military operation he said Israel was preparing to bring a halt to the rocket fire.

"We're getting close to using our full strength. Until now, we've used a small percentage of the army's power because of the nature of the territory."

Israel would not launch a ground offensive in the next week or two, partly because the military would prefer to wait for better weather, defence sources said. But the army had completed its preparations and was awaiting the government's order to move, officials said.

Until now, the Palestinian rocket squads have largely targeted Sderot, a small town near Gaza. Ashkelon, a big population centre only 25 miles from Tel Aviv, was caught unprepared, its mayor said on Friday.

"It's a city of 120,000 people, with large facilities – a huge soccer stadium, a basketball stadium and a beach. No one is ready for this," Roni Mehatzri told Israel Radio.

Dozens of soldiers in orange berets from the Israeli military's home front command arrived in Ashkelon and hung posters around the city telling residents what to do in case of rocket attack.

The barrage of Iranian-made Grads directed at Ashkelon yesterday came after an escalation of violence in Gaza. Israel killed five Hamas militants on Wednesday morning, apparently including two planners of the rocket attacks, in an air strike on a minivan.

Later in the day, a Palestinian rocket killed an Israeli civilian, a 47-year-old father of four, in Sderot.

Hamas, an Islamist group with close ties to Iran, has ruled Gaza since its violent takeover there in June 2006.

Since Wednesday, 32 Palestinians have been killed by Israeli missile strikes, including 14 civilians, among them eight children, according to Palestinian officials. The youngest was a six-month-old boy, Mohammed al-Borai, whose funeral was held yesterday.

There were further indications that Israel was preparing for an offensive by sending confidential messages to world leaders, including the US secretary of state, Condoleezza Rice, who plans to visit the region next week.

"Israel is not keen on, and rushing for, an offensive, but Hamas is leaving us no choice," the Israeli defence minister, Ehud Barak, told the senior figures, according to Israel's mass circulation daily, Yedioth Ahronoth.

Security sources were quoted by both Israel Radio and army radio as saying a big operation was being prepared but was not imminent.