Israel pounded nearly 30 targets in Gaza overnight after militants fired scores of rockets into the south, prompting Palestinian leader Mahmud Abbas to demand Thursday that it halt its "escalation."
The rocket barrage, which was the heaviest since an eight-day conflict between Israel and Gaza's Hamas rulers in November 2012, sent thousands of Israelis fleeing for cover across the south on Wednesday afternoon.
So far, there have been no reports of casualties on either side of the border.
And experts said Israel was not interested in a major confrontation with Gaza's Hamas rulers.
The latest tit-for-tat violence was sparked by an incident on Tuesday when militants of the hardline Islamic Jihad group fired a mortar round at troops allegedly trying to enter southern Gaza, prompting an Israeli air strike which killed three of them.
In retaliation, Islamic Jihad's armed wing, the Quds Brigades, fired scores of rockets over the border on Wednesday, with the group putting the number at 130.
Israel responded with air strikes on 29 targets across Gaza, hitting bases used by Hamas as well as those of Islamic Jihad, which has so far claimed all of the rocket fire.
The army said more than 60 rockets had struck southern Israel, five of them hitting populated areas. Another three were intercepted by the Iron Dome air defence system.
"In response to the massive rocket attack that hit Israel earlier this evening, the Israel Air Force targeted 29 terror sites in the Gaza Strip. Direct hits were confirmed," it said.
Security sources in Gaza said there were no casualties in the air strikes as all the sites had been evacuated.
Early Thursday, militants fired another five rockets but only one struck Israeli territory, the army said.
By daybreak all was quiet, an AFP correspondent on the Israeli side of the border reported.
The air strikes, which began at around 2030 GMT on Wednesday, prompted a sharp rebuke from Abbas, who demanded Israel "put an end to its military escalation in the besieged Gaza Strip," his spokesman Nabil Abu Rudeina said.
But Israeli Prime Minister Benjamin Netanyahu quickly hit back.
"Abbas didn't condemn the rocketing of our citizens, he condemned Israel for hitting three terrorists who fired mortars on us," Netanyahu said, referring to Tuesday's border incident.
"That's wrong," he said, his remarks quoted by spokesman Ofir Gendelman.
Earlier, Netanyahu warned that Israel would act "with great force" against those seeking to attack it.
"If there won't be quiet in the south, there will be noise in Gaza," he remarked drily after a conference call with his defence chiefs in which he instructed them to do whatever necessary to restore calm.
He was to convene a special session of his security cabinet in Tel Aviv later on Thursday, army radio said.
Foreign Minister Avigdor Lieberman said on Wednesday that Israel would have no choice but to reoccupy Gaza, from which it withdrew all troops and settlers in summer 2005.
But experts said Israel was not seeking a major confrontation in the territory.
"Israel has no intention of entering a major operation now," said Yaakov Amidror, who served as national security adviser until November.
"But if there's a continued response from the other side, the army will have to reconsider," he told army radio, adding that re-entering Gaza was "an option" but not one that Israel would rush into.
"It depends on the other side's decisions. Hamas is not joining in at this stage and that's a good thing."
Washington denounced the rocket fire as "reprehensible" and called for an immediate halt to such "terrorist attacks."
The flare-up came as British Prime Minister David Cameron was in Israel on his first visit since taking office in 2010.