Palestinian militants have bombarded Israel with dozens of rockets and mortar shells.

In response, Israeli warplanes struck targets throughout the Gaza Strip in what appeared to be the most intense exchange of fire since the 2014 war.

Palestinian officials said at least three people, including two militants, were killed by Israeli fire and nine were wounded.

In Israel, the national rescue service said at least seven people were wounded, including a 19-year-old soldier who was in critical condition.

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Israeli soldiers take cover near the Israel Gaza border (Tsafrir Abayov/AP)

The fighting, which cast doubt over recent understandings brokered by Egypt and UN officials to reduce tensions, was triggered by a botched undercover Israeli military raid in Gaza the day before.

The undercover troops, apparently on a reconnaissance mission, were discovered several miles inside Gaza, setting off a battle that left seven militants, including a Hamas commander, and an Israeli military officer dead.

Around sundown on Monday, militants launched some 100 rockets in less than an hour, the most intense barrage since the 50-day war four years ago.

The outgoing rockets, which continued into the evening, lit up the skies of Gaza and set off air raid sirens throughout southern Israel.

The Israeli military said it was dispatching warplanes to strike “terror targets” across Gaza.

The military said warplanes, helicopters and tanks had struck over 20 militant targets, including military compounds and observation posts.

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Protesters wave their national flags near the fence of Gaza Strip border with Israel (Adel Hana/AP)

It also said it targeted a squad that was launching rockets.

Hamas and Islamic Jihad, a smaller militant group, said the rocket fire was revenge for Sunday night’s Israeli incursion.

Islamic Jihad spokesman Daoud Shehab said the groups wanted “the occupation and its supporters know that the lives of our sons come with a price”.

In all, some 200 rockets were fired into Israel by mid-evening, the army said.

The Israeli military said it intercepted 60 rockets. Rockets landed in the southern Israeli town of Sderot, setting off a large fire near a shopping centre.

Another rocket landed near a factory, and a home was hit in the southern city of Ashkelon. Some landed in open areas.

A bus travelling near the Gaza border was struck, critically wounding a 19-year-old man, Israel’s rescue service said.

The strike set the bus on fire, sending a large plume of black smoke over the area. Six other people were lightly wounded by shrapnel, it said.

Michael Oren, an Israeli Cabinet minister, said Israel “will do whatever it takes” to defend itself.

“We expect the world to stand with us,” he said.

The EU’s ambassador to Israel, Emanuele Giaufret, called for a halt in “indiscriminate” rocket fire toward civilians. “Everyone must step back from the brink,” he said.

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Mourners carry the body of Hamas militant commander Nour el-Deen Barakas (Adel Hana/AP)

Earlier on Monday, thousands of Palestinian mourners buried the seven militants killed in Sunday’s incursion.

Hamas leader Ismail Haniyeh led a funeral as masked gunmen in uniforms carried coffins and mourners chanted “revenge”.

Hamas set up checkpoints across Gaza in a show of force. It also restricted movement through crossings with Israel, preventing foreign journalists, local businessmen and some aid workers from leaving the territory.

Hamas also cancelled a weekly beach protest in northwestern Gaza along the border with Israel. The organisers cited “the ongoing security situation”.

Israel and Hamas have fought three wars since the Islamic militant group seized control of Gaza from the internationally-backed Palestinian Authority in 2007.

In the most recent war, over 2,200 Palestinians were killed, more than half of them civilians, and tens of thousands were left homeless. Seventy-three people were killed on the Israeli side.

Israel and Egypt have maintained a blockade on Gaza since the Hamas takeover. The continued fighting, along with the blockade, have devastated Gaza’s economy.

Unemployment is over 50%, the territory suffers from chronic power outages and most residents are unable to travel abroad.