Eleven Palestinians, including a 16-year-old, were killed and more than 80 wounded in a gun battle on Wednesday after Israeli troops raided the city of Nablus in the occupied West Bank.
The death toll was the highest since the second Palestinian intifada, or uprising, ended in 2005.
Prime Minister Benjamin Netanyahu, who heads a new coalition government regarded as the most right-wing in Israel's history, praised Israeli forces and vowed to "hit terrorism hard" after the army said it targeted suspected militants in Nablus.
The United States said it was "extremely concerned by the levels of violence" and called for a de-escalation, as did the United Nations.
Before dawn on Thursday, Palestinian militants fired rockets from Gaza at Israel, prompting air strikes by the army on multiple sites in the coastal enclave.
Palestinian militant group Islamic Jihad claimed responsibility for the rockets, after saying one of its commanders was killed in the Nablus raid.
The Israeli army said it intercepted five rockets, while a sixth struck an uninhabited area.
Two hours later Israeli air strikes targeted a "weapons factory" and a "military camp" run by Gaza's Islamist rulers Hamas, the army said, sending plumes of black smoke into the sky.
Following the cross-border fire, Netanyahu warned: "whoever tries to attack us will pay the price".
Tensions were still high in the evening. By the border fence in northern Gaza, dozens of men protested, waving Palestinian flags and burning tyres in support of the people of Nablus, where frequent clashes between Israeli troops and Palestinian militants have occurred in recent months.
"The upcoming days will be hot, and we will not sit idly by," protester Mohammed Ahmed, his head wrapped in a keffiyeh, told AFP.
- 'War zone' -
UN rights chief Volker Turk said he was "deeply concerned" over the deaths and injuries in the Nablus operation, "and by airstrikes and rocket attacks between Israel and Palestinian armed groups in the Gaza Strip." In a statement relayed by his office, Turk also suggested Israel showed "disregard for the lives and security of bystanders" in Nablus.
The army said Wednesday's raid targeted three suspects implicated in shootings in the West Bank, occupied by Israel since the 1967 Six-Day War. An estimated 475,000 Jewish settlers live in the territory, alongside about 2.9 million Palestinians, in communities considered illegal under international law.
Israel's new government earlier this month said it would legalise nine settlements in the occupied West Bank following a series of attacks in east Jerusalem.
The latest violence comes on top of unrest last year which was the deadliest in the West Bank since the United Nations started tracking casualties in 2005.
Hours after the Nablus raid, the ministry announced the death of Anan Ennab, 66, from tear gas inhalation.
He had been in the market when the Israeli incursion began, his brother Allam Ennab said Thursday.
"What happened yesterday in Nablus was a real massacre, like I've never seen before," the 68-year-old told AFP.
Palestinian health officials said 82 people were hospitalised for gunshot wounds. The Palestinian Red Crescent Society said its medics also treated 250 cases of tear gas inhalation.
- General strike -
Talaat Ziada, the head of the intensive care unit in Nablus's Rafidia hospital, said his youngest patient was an 11-year-old boy.
"It was a war zone in the Old City, and it was also a war zone here," he told AFP.
"The corridors and stairs were covered in blood, and people were scrambling to check on their relatives."
Palestinian shops were closed on Thursday in annexed east Jerusalem and elsewhere in the West Bank, including Nablus, after a general strike call to protest the violence.
Mahde Salim, the uncle of Hossam Salim who was one of men killed, said his nephew used to be a bulldozer driver and had worked in an Israeli settlement.
"But he left work there and joined the resistance fighters," he told AFP.
The Palestinian health ministry announced Thursday a 30-year-old man died from his wounds, after being shot earlier this month by Israeli forces in Jenin.
Since the start of this year, the Israeli-Palestinian conflict has claimed the lives of 61 Palestinian adults and children, including militants and civilians.
Nine Israeli civilians, including three children, a police officer and one Ukrainian civilian have been killed over the same period, according to an AFP tally based on official sources from both sides.
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