Militants in Gaza began firing rockets into Israel on Monday night, and Israel responded by hitting targets in the territory.
On Wednesday Israel said it had killed senior officials of the Hamas group in Gaza, and was also targeting missile launching sites.
"This was only the beginning. We will inflict blows on them that they have never dreamed of," said the Israeli prime minister.
Hamas - which runs Gaza - confirmed the death of its commander in Gaza City and other "warriors".
"Thousands of leaders and soldiers will follow in their footsteps," Hamas said in a statement reported by Reuters news agency.
But the Russian foreign ministry in a statement quoted a Hamas spokesman as saying the movement was ready for a ceasefire if Israel stopped "violent acts" in East Jerusalem and "illegal measures in respect of its native Arab residents".
The Hamas-run health ministry in Gaza says that more than 360 people have been injured there since the conflict began, as well as 65 who have died.
The Israel Defence Forces (IDF) said on Wednesday that their strikes on Gaza were the largest since the conflict in 2014.
On Wednesday a third high-rise building in Gaza was destroyed.
Hamas said it was incensed by "the enemy's targeting of residential towers".
Residents had been warned to evacuate the buildings before fighter jets attacked; however, health officials said there were still civilian deaths.
Five members of one family were killed in an air strike on Tuesday, including two young brothers, according to AFP news agency.
An 11-year-old resident of Gaza, Yasmine, told Save the Children that Tuesday had been the worst night of her life.
"I had pain in my stomach from the fear and my parents were trying to comfort me and tell me the bombing was far away but I could feel that it was close," she told the charity. "Tomorrow is Eid and we won't be celebrating because of this conflict."
Millions of Israelis were heading to bomb shelters on Wednesday evening, according to the IDF, as sirens warning of rockets sounded across the country.
On Wednesday morning an Israeli soldier was killed by an anti-tank missile fired from Gaza into Israel, authorities said.
There were conflicting reports on the fate of a six-year-old boy hit in a rocket attack on the town of Sderot, with some saying he had died in the attack.
Two people, a man and his teenage daughter, were killed in Lod when a rocket hit their car. They were both Israeli Arabs.
Israeli police reported what they called violent riots in dozens of areas of the country overnight, with 270 people arrested.
Synagogues and businesses in Lod were set on fire.
Mr Netanyahu described the riots as "unbearable" and said they reminded the Jewish people of their past.
Israeli police said that Lod would be placed under curfew from 20:00 local time on Wednesday until 04:00 on Thursday to preserve the safety and property of residents.
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