By Nidal al-Mughrabi
GAZA (Reuters) - Israeli soldiers and Palestinian militants battled on Gaza City's outskirts on Sunday after Israeli troops and tanks invaded the coastal enclave in the worst fighting in the conflict in decades.
Many Palestinian civilians as well as Hamas fighters were killed or wounded as Israeli shells slammed into houses and Gaza's main shopping district, witnesses and Palestinian medical sources said.
Ambulances struggled to reach the victims as fighting intensified in the territory crammed with 1.5 million people.
The long-predicted invasion of Hamas-ruled Gaza followed a week of Israeli bombardments from land, sea and air which failed to halt militant Hamas rocket attacks on southern Israel, the stated provocation for the assault.
About 25 rockets were fired at Israel on Sunday, one hitting a house in Sderot and wounding a woman, the Israeli army said.
Nearly 500 Palestinians have been killed in the nine days of "Operation Cast Lead." Four Israelis have been killed by the Hamas rocket strikes.
Israeli officials said the offensive could last many days.
Calls for a cease-fire from the United States, Israel's staunch backer, other foreign governments and the United Nations failed to gain traction over disagreements about its terms.
TERRITORY CUT IN HALF
Israeli tanks and troops virtually cut Gaza in half in a night-time advance and by Sunday morning were ringing Gaza City itself, Palestinian witnesses said.
Tank shells killed at least five Palestinian civilians and wounded 40 when they exploded in Gaza City's main shopping area, hospital staff and witnesses said.
In Beit Lahiya, 12 Palestinians were killed, at least two of them fighters but also four members of a family when a shell hit their home.
Soldiers and Hamas fighters were locked in gunbattles east of the Hamas stronghold of Zeitoun, witnesses said.
"They have come to where we wanted and they will soon receive our gifts," a Hamas officer near the frontline said.
Hamas said it had captured two Israeli soldiers, an event which would highlight the political risk domestically for Israel of sending its troops into Gaza. The Israeli army said it had no knowledge of any of its soldiers being seized.
Israel said 30 of its soldiers had been wounded since the start of the ground assault.
Israeli aircraft struck dozens of targets, including arms smuggling tunnels, weapons depots and mortar squads.
"During exchanges of fire overnight, dozens of armed Hamas operatives were hit," an Israeli military communique said.
Heavy civilian casualties are likely to increase international pressure on Israel to halt its biggest operation in the Gaza Strip in four decades.
But the fighting also holds significant political risks for Israeli leaders before a February 10 national election, especially if its forces take heavy casualties in street fighting.
Israeli Defence Minister Ehud Barak said the aim of the ground push was to protect southern Israel from Hamas rocket attacks. He refrained in a televised address from making any threat to try to topple the Hamas government.
"It won't be easy. It won't be short," said Barak, leader of the centre-left Labour party and a candidate for prime minister in the election.
A spokesman for Hamas's armed wing, the Izz el-Deen al-Qassam Brigades, said Israeli troops faced death or capture.
"The Zionist enemy must know his battle in Gaza is a losing one," spokesman Abu Ubaida said.
The plight of Palestinian civilians was growing more desperate. People have taken shelter in their homes for days and humanitarian agencies warned that water, food and medical supplies were running short.
A spokesman for Palestinian President Mahmoud Abbas condemned the Israeli attack as "a vicious aggression."
In New York, the U.N. Security Council met to discuss the latest developments. Several diplomats said a U.S. refusal to back the Libyan-drafted demand for an immediate truce had killed the initiative.
The United States said a cease-fire should take place as soon as possible but must guarantee an end to Hamas rocket strikes.
Former British Prime Minister Tony Blair, representing major powers sponsoring Middle East peace talks, was to begin shuttling on Sunday between Israeli leaders and Palestinian leaders -- Hamas's rivals -- in the occupied West Bank.
France condemned the Israeli ground assault and Hamas rocket fire. French President Nicolas Sarkozy is due in Jerusalem on Monday.
U.N. Secretary-General Ban Ki-moon called for an immediate end to the ground operation. In a telephone conversation with Israeli Prime Minister Ehud Olmert, Ban conveyed his "extreme concerns and disappointment," a U.N. statement said.
Ban also asked that Israel ensure the safety of civilians and allow humanitarian assistance to reach those in need.
Hamas called off a six-month truce with Israel last month and stepped up its rocket attacks, complaining at Israeli raids into Gaza and a continuing blockade of the enclave.
Israel occupied Gaza in the 1967 Middle East War and formally ended its military rule in 2005 after a series of Palestinian uprisings, but it still controls the borders.
International peace efforts aimed at creating an independent Palestinian state foundered after Hamas won elections in 2006 and drove Fatah forces loyal to Abbas from Gaza a year later.
(Writing by Angus MacSwan; Editing by Janet Lawrence; email@example.com; +972 2 632 2202)