By Nidal al-Mughrabi
GAZA (Reuters) - Israel pressed on with its ground offensive in the Gaza Strip for a fourth day on Tuesday despite new international calls for a cease-fire in a conflict in which more than 540 Palestinians have been killed.
Three Israeli soldiers were killed and 24 were wounded on Monday when an Israeli tank mistakenly fired at a building in northern Gaza that they had occupied in fighting against Islamist Hamas militants, the Israeli military said.
The "friendly fire" incident caused the military's highest casualty toll since Israel launched its 11-day-old offensive against Hamas. Eight Israelis, including four civilians hit in Palestinian rocket attacks, have been killed in the conflict.
Israel sent ground forces into the Hamas-controlled territory on Saturday after a week of air strikes did not stop Gaza militants from firing rockets at its southern towns.
Fighting between Israeli troops and militants intensified in the densely-populated Gaza Strip on Monday.
Israel said it had killed dozens of militants as the battle crept into the suburbs of the city of Gaza itself. Palestinian officials said more than 30 civilians were killed.
Israeli Defence Minister Ehud Barak said the assault could get harder for troops. Hamas, vowing to fight on in every street and alley, threatened to fire more rockets across into Israel.
French President Nicolas Sarkozy, on a peace mission to the Middle East, and U.S. President George W. Bush, in his final weeks in the White House, both appealed for a cease-fire.
But disagreement on who should stop shooting first and on what terms made the chances of a quick truce seem remote.
Israel, whose leaders fight a parliamentary poll on February 10, made clear its priority was securing the safety of its citizens. Hamas demanded a lifting of Israel's blockade of Gaza. Many of the enclave's 1.5 million people lack food, water or power.
The Jewish state launched the offensive after Hamas called off a six-month truce last month and stepped up cross-border rocket attacks in response to Israeli raids and the blockade.
Israeli media reported that Hamas gunmen were manoeuvring within a well-fortified tunnel system and that Israeli troops had encountered Palestinian suicide bombers.
Militants had been trying to lure Israeli soldiers into built-up areas, witnesses said.
An overnight Israeli air strike in the southern Gaza town of Rafah killed a Palestinian woman, medical officials said.
Barak told Israeli legislators on Monday Hamas had been dealt a heavy blow.
"But we cannot say that its fighting capabilities have been harmed ... Difficult moments lie ahead in this operation and the main test could still be ahead," he said.
Hamas leaders, who have support from Iran and Syria but are viewed with suspicion by most Arab states, were defiant.
Thousands of fighters were waiting "in every street, every alley and at every house" to tackle the Israeli forces, Hamas military spokesman Abu Ubaida said in a broadcast speech.
Hamas would increase its rocket strikes on Israel if the Jewish state kept on attacking Gaza, said Ubaida.
Hamas, which wants to reverse the events of 1948 that created the Jewish state and turned Palestinians into refugees, won a parliamentary election in 2006.
It routed rival forces loyal to Palestinian President Mahmoud Abbas in 2007, seizing control of Gaza and creating a schism that has blighted Abbas's bid to found a Palestinian state through U.S.-brokered talks with Israel.
Israel pulled its troops and more than 8,000 settlers out of Gaza in 2005 after 38 years of occupation in a move that many at the time hoped would lead to a breakthrough for relations between Israel and the Palestinians.
(Writing by Ari Rabinovitch; Editing by Ralph Gowling)