Israeli Prime Minister Benjamin Netanyahu has vowed to "change the Middle East" in Israel's war with Palestinian militant group Hamas, as the Israeli army continues to pound Gaza with air strikes.

"What Hamas will experience will be difficult and terrible ... we are going to change the Middle East," Mr Netanyahu told officials in the country's south where Hamas militants carried out a surprise attack on Saturday morning.

"This is only the beginning ... we are all with you and we will defeat them with force, enormous force."

It comes as Israel said its troops have killed a number of armed infiltrators entering the country from Lebanon, raising fears fighting could spread two days after Hamas gunmen burst in from Gaza on a deadly rampage.

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The Israeli military said it had called up an unprecedented 300,000 reservists and was imposing a total blockade of Gaza, signs it could be planning a ground assault there to defeat Hamas.

Hamas fighters were still holed up in several locations inside Israel two days after they burst across from Gaza killing 700 Israelis and seizing dozens of hostages in a raid that shattered Israel's reputation of invincibility.

In Hamas-controlled Gaza, Israel pressed on with its most intensive retaliatory strikes ever, which have killed more than 500 people since Saturday.

A plume of smoke rises in the sky above Gaza City during an Israeli airstrike

Defence Minister Yoav Gallant announced Israel's tightened blockade which would keep even food and fuel from reaching Gaza, home to 2.3 million people.

As night fell, the Israeli air strikes became more aggressive and witnesses said several Hamas security headquarters and ministries were hit. The strikes also destroyed some roads and houses.

Israel also bombed the headquarters of the private Palestinian Telecommunication Co., which could impact land phone, internet and mobile phone services.

UN Secretary-General Antonio Guterres said some 137,000 people were taking shelter with UNRWA, the UN agency that provides essential services to Palestinians.

The prospect that fighting could spread to other areas has alarmed the region. Israeli troops "killed a number of armed suspects that infiltrated into Israeli territory from Lebanese territory," the military said, adding helicopters "are currently striking in the area".

An official with Hezbollah denied that the group had mounted any operation into Israel. Hezbollah, a Shi'ite militant group powerful in southern Lebanon, is backed by Iran like Hamas.

Artillery shelling and gunfire were heard at Lebanon's southern border with Israel, a correspondent for Hezbollah's Al-Manar TV said in a post on social media.

Israel's Army Radio gave the location as being near Adamit, across from the Lebanese border towns of Aalma El Chaeb and Zahajra.

In Israel's south, scene of the deadly Hamas attack, Israel's chief military spokesman said troops had re-established control of communities inside Israel that had been overrun, but that isolated clashes continued as some gunmen remained active.

"We are now carrying out searches in all of the communities and clearing the area," chief military spokesperson Rear-Admiral Daniel Hagari said.

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Earlier, another spokesman, Lieutenant Colonel Richard Hecht, acknowledged that it was "taking more time than we expected to get things back into a defensive, security posture".

The shocking images of the bodies of hundreds of Israeli civilians sprawled across the streets of towns, shot at an outdoor dance party and abducted from their homes were like nothing seen before in the decades-old Israeli-Palestinian conflict.

The announcement that 300,000 reservists had already been activated in just two days added to speculation that Israel could be contemplating a ground assault of Gaza, a territory it abandoned nearly two decades ago.

"We have never drafted so many reservists on such a scale," Rear-Admiral Hagari said. "We are going on the offensive."

Palestinians reported receiving calls and mobile phone audio messages from Israeli security officers telling them to leave areas mainly in the northern and eastern territories of Gaza, and warning that the army would operate there.

Hamas, an armed Islamist group that calls for Israel's destruction, says its attack was justified by the plight of Gaza under a 16-year blockade and the deadliest Israeli crackdown for years in the occupied West Bank.

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'A total massacre'

Mainstream Palestinian groups who deplored the attacks said the violence was nonetheless predictable, with a peace process frozen for nearly a decade and far-right Israeli leaders talking of annexing Palestinian land once and for all.

Israel and Western countries said nothing justified the intentional mass killing of civilians.

The attackers shot and killed scores of young Israelis at an outdoor desert dance party - media reported 260 killed there.

A day later dozens of survivors were still emerging from hiding. The site was littered with wrecked and abandoned cars.

"It was just a massacre, a total massacre," said Arik Nani, who had been celebrating his 26th birthday and escaped by hiding for hours in a field.

In Gaza, footage obtained by Reuters showed dozens of people climbing over collapsed buildings in search of survivors, the air still dusty from impact.

Sirens rang out as emergency teams put out cars that had caught fire.

"The man you see is one martyr of dozens. This place is packed with residents and people who were displaced," a man said in the video as people pulled a body from the rubble.

At least 560 Palestinians have been killed and 2,900 wounded in Israeli air strikes on the blockaded enclave since Saturday, said Gaza's Health Ministry.

"The Zionist enemy's military targeting and bombing of homes inhabited by women and children, mosques and schools in Gaza amount to war crimes and terrorism," Hamas official Izzat Reshiq said in a statement.

Palestinians inspect the damage following an Israeli airstrike on the Sousi mosque in Gaza City

Egyptian, Qatari mediation

Egypt, which has mediated between Israel and Hamas at times of conflict in the past, was in close contact with the two sides, trying to prevent further escalation, according to Egyptian security sources.

Qatari mediators have held urgent calls with Hamas officials to try to negotiate freedom for Israeli women and children seized by the militant group and held in Gaza, in exchange for the release of 36 Palestinian women and children from Israel's prisons, a source told Reuters.

The violence jeopardises US-backed moves towards normalising relations between Israel and Saudi Arabia - a security realignment that could have threatened Palestinian hopes of self determination and hemmed in Hamas's backer Iran.

"The price the Gaza Strip will pay will be a very heavy one that will change reality for generations," Defence Minister Gallant said in Ofakim, one of the towns that had been attacked.

Israel's military faces harsh questions for the country's worst intelligence failure in 50 years.

Netanyahu's options may also be curtailed by concern over the fate of Israeli hostages.

A ground assault would be a major step for Israel, which has sent troops back into Gaza twice since it abandoned the territory nearly two decades ago, but has tried to avoid reimposing any long-term occupation there.

Israeli officials have not confirmed any plans for a ground assault but have discussed what it might entail.

Agriculture Minister Avi Dichter, a member of President Netanyahu's security cabinet, likened a possible operation to a 2002 sweep of the West Bank in which Palestinian cities were encircled and then-Palestinian leader Yasser Arafat besieged in his headquarters.

"Israel cannot agree to a situation in which military terrorist organisations will exist at a proximity of a few hundred meters, a kilometre, and so all of these capabilities will be destroyed," he told Israel's Channel 12 TV late yesterday.

Read more:
What we know about the Hamas assault on Israel
What is the Palestinian group Hamas?
Timeline: Conflict between Israel and Hamas

Several Americans were killed by Hamas attackers, a White House National Security Council spokesperson confirmed. Thailand said 12 of its nationals had been killed and 11 kidnapped.

Palestinian fighters took dozens of hostages to Gaza, including soldiers and civilians, children and the elderly. A second Palestinian militant group, Islamic Jihad, said it was holding more than 30 of the captives.

About 30 missing Israelis attending a dance party that was attacked by gunmen emerged from hiding yesterday, Israeli media reported, putting the death toll at the outdoor gathering at 260.

"The cruel reality is Hamas took hostages as an insurance policy against Israeli retaliatory action, particularly a massive ground attack and to trade for Palestinian prisoners," said Aaron David Miller, a senior fellow at the Carnegie Endowment for International Peace.

US President Joe Biden spoke to Israeli Prime Minister Benjamin Netanyahu for the second straight day yesterday, saying in a post on the social media platform X that he expressed "my full support for the people of Israel in the face of an unprecedented and appalling assault by Hamas terrorists".

The United States led Western denunciations of Hamas' attack, with Mr Biden issuing a warning to Iran and others that this was "not a moment for any party hostile to Israel to exploit these attacks".

US Defence Secretary Lloyd Austin said he had ordered the USS Gerald R. Ford Carrier Strike Group to the eastern Mediterranean as a show of support to Israel.

In Gaza, Hamas spokesperson Hazem Qassem condemned the US announcement as "an actual participation in the aggression against our people".

The violence may undermine US-backed moves towards normalising relations between Israel and Saudi Arabia - a security realignment that could threaten Palestinian hopes of self determination and hem in Hamas' main backer, Iran.

Tehran's other main regional ally, Lebanon's Hezbollah, fought a war with Israel in 2006 and said its "guns and rockets" stand with Hamas.

The escalation follows surging violence between Israel and Palestinian militants in the Israeli-occupied West Bank, where a Palestinian authority exercises limited self-rule, opposed by Hamas that wants Israel destroyed.

Conditions in the West Bank have worsened under Mr Netanyahu's hard-right government, with more Israeli raids and assaults by Jewish settlers on Palestinian villages, and the Palestinian Authority called for an emergency Arab League meeting.

Hamas leader Ismail Haniyeh said the assault would spread to the West Bank and Jerusalem. Gazans have lived under an Israeli-led blockade for 16 years, since Hamas seized control of the territory in 2007.

"How many times have we warned you that the Palestinian people have been living in refugee camps for 75 years, and you refuse to recognise the rights of our people?" Mr Haniyeh said.

The UN appealed for the creation of humanitarian corridors to bring food into Gaza and said at least 70,000 Palestinians in Gaza are seeking shelter in schools it runs.