In northern Gaza, Palestinians blocked roads with dirt and barbed wire. Militants wielding automatic rifles and anti-tank rockets patrolled the streets as tensions hit their highest along the frontier since Israel quit Gaza nearly a year ago.

The United States urged Israel to give diplomacy a chance to win the release of Corporal Gilad Shalit, who was seized on Sunday by militants who also killed two soldiers in a raid on a military border post.

Israel said leaders of the ruling Hamas movement could become assassination targets, including the group's supreme leader Khaled Meshaal who lives in exile in Damascus.

Hamas's armed wing has said it carried out Sunday's attack with other factions but has not said it was holding Shalit. "They have to understand one thing, that nobody is immune, including Khaled Meshaal. Nobody is immune," cabinet minister and former general Benjamin Ben-Eliezer said on Army Radio.

Abu Ubaida, a spokesman for Hamas's armed wing, warned Israel of a "painful" response if its forces re-invaded.

"The enemy will regret the moment they raid Gaza. The price will be so heavy," said the spokesman, dressed in military fatigues and clutching an AK-47 assault rifle.

At Nizmit Hill, just across from northern Gaza, around 100 Israeli tanks and armoured personnel carriers faced the coastal strip after more tanks arrived overnight.

Officials have not said when troops might go in.

Israeli media said the government had also approved a contingency plan to cut food, water and gas supplies to the Gaza Strip if the 19-year-old conscript was not freed.

Hamas's armed wing, along with the Popular Resistance Committees (PRC) and the Islamic Army on Monday said Israel would not get information about the soldier unless it freed all jailed Palestinian women and youths. Israel rejected the demand.

Prime Minister Ehud Olmert has held Hamas, which took office in March, and the Palestinian Authority chaired by moderate President Mahmoud Abbas responsible for Sunday's assault.

"The time is approaching for a comprehensive, sharp and severe Israeli operation. We will not wait forever," he said.

U.S. Secretary of State Condoleezza Rice urged restraint.

"There really needs to be an effort now to try and calm the situation," Rice told reporters en route to Pakistan.

"Military Statement 1", issued by the three militant groups, did not confirm directly they were holding Shalit, a tank gunner, nor give details of his condition.

Israeli and Palestinian officials said about 100 Palestinian women and 300 youths were in Israeli jails for alleged security offences.

In a separate statement, the PRC said on Monday it had kidnapped a Jewish settler in the occupied West Bank. It produced no evidence to substantiate the claim.

The Israeli army said it was unaware of the abduction.

Militant groups said Sunday's raid was in response to the killing of 14 Palestinian civilians in Israeli air strikes in Gaza against militants behind cross-border rocket attacks.

Israel Television's military affairs correspondent, who is briefed regularly by the army, said it would take another day or two until enough forces were in place for a ground operation.

Other defence commentators in Israel said Olmert could not rush into Gaza for fear militants would kill the soldier, but waiting too long would make his government appear weak.

Israel completed a withdrawal of Jewish settlers and soldiers last September after 38 years of occupation.