Israel stepped up pressure Wednesday on Hamas militants who launched improved, longer range rockets into the heart of a major Israeli city, authorizing the army to enter populated areas in the northern Gaza Strip.

The planned invasion threatened to be far bloodier than Israel's week-old offensive in Gaza aimed at freeing an abducted soldier.

To carve out a sufficiently wide buffer zone to protect Israeli towns from such attacks, the army might have to go into densely populated areas where it can expect fierce resistance from Palestinian militants.

Previous raids into the northern town of Jebaliya have sparked running gunbattles that have caused serious casualties on both sides.

"There will be steps taken and they will be very serious," said Cabinet Minister Yitzhak Herzog, who refused to elaborate on the military's plans. "There is a very broad operation here. It will continue."

Israel has had soldiers massed on its border with northern Gaza since June 29, but Israeli officials postponed a planned invasion as international mediators sought a way out of the standoff over Cpl. Gilad Shalit. The 19-year-old soldier was captured by Palestinian militants on June 25.

Justice Minister Haim Ramon said Wednesday he believes Shalit, who reportedly was wounded in the attack, is alive and being held somewhere in Gaza.

The Security Cabinet's decision to step up a ground offensive indicated Israel could be prepared to partially reoccupy Gaza less than a year after withdrawing all troops and settlements from the area.

Prime Minister Ehud Olmert convened the urgent meeting after Hamas militants fired a rocket Tuesday into Ashkelon, a southern Israeli city of 110,000 people. Militants fired a second rocket Wednesday that hit an orchard in the city.

The attacks caused no injuries, but were the first time rockets have penetrated so far into Israel, signaling that militants have improved the range of the primitive weapons.

As Egyptian and Turkish mediators tried to end the worsening crisis, Mohammed Awad, the Palestinian Cabinet secretary, told reporters in Gaza on Wednesday that the "Israeli escalation is posing a threat to these ongoing efforts and it must stop."

In Cairo, Egypt's mediation efforts ground to a halt because Hamas' Syria-based political chief Khaled Mashaal refused to press for the unconditional release of Shalit and because of growing mistrust between Egypt and Hamas, Egyptian and Palestinian officials said.

Mashaal was turning his attention to Turkey, which has stepped up diplomacy in an effort to end the standoff, the Palestinian officials said.

Mashaal has denied claims by Israel that he masterminded Shalit's capture.

The Hamas-linked militants holding the soldier have demanded Israel release hundreds of Palestinian prisoners in exchange for information about the captive. On Tuesday, Olmert ignored a deadline to begin freeing prisoners. Israel has publicly refused to negotiate with the militants, but could be indirectly communicating with Hamas through the Egyptian or Turkish mediators.

U.N. Mideast envoy Alvaro de Soto urged both sides to show restraint.

"We hope that it will be possible for both sides to stop for a minute and reflect on this situation and not allow it to get any worse than it already is," de Soto told The Associated Press.

Olmert and Defense Minister Amir Peretz met Wednesday with top military officials to decide which parts of a broad invasion should be immediately implemented, including the possibility of creating a buffer zone.

Olmert's office denied the Cabinet had approved the formation of such a zone. But meeting participants said the ministers had agreed a standing plan by the army to create a buffer zone could be an effective way of preventing rocket fire.

A statement from Olmert's office gave no details about the military operation, but said the army would continue to go after Hamas militants and their infrastructure. It said the army has been ordered to "prepare for a phased and continuous" operation. Its main goals remain to find Shalit and to prevent more rocket fire into Israel, the statement said.

Israel occupied a strip of southern Lebanon for 18 years before withdrawing in 2000 after high casualties raised public complaints in Israel. A similar occupation in northern Gaza could be risky.

Israel could establish a security zone in its abandoned former settlements in northern Gaza, vacant lands that militants use to fire rockets and that Israel could seize with relatively little bloodshed. If Israel wants a broader zone, it might have to enter the northern towns of Beit Lahiya and Beit Hanoun, which would likely lead to bloody street battles with militants.

Meanwhile, Israel continued airstrikes in Gaza on Wednesday, targeting the Palestinian Interior Ministry for the second time in a week. Witnesses said missiles hit the main structure and damaged a building next to the ministry. Rescue workers said five people were wounded.

The two top floors of the main building collapsed, and the second building, which provides housing for ministry employees, was set on fire, witnesses said.

Israeli aircraft fired missiles at a Hamas camp in southern Gaza and a Hamas-affiliated school in Gaza City, and shelled open areas in the north.

At the Erez industrial zone on the Gaza border, which has been shut since hostilities escalated, troops opened fire at Palestinians who were apparently looting closed businesses, wounding a 13-year-old boy in the head, Palestinian medics said. The army said it had no knowledge of the incident.