GAZA CITY (AFP) — Israel indicated for the first time on Sunday that an end was in sight to its war on Hamas, amid some of the heaviest clashes of an offensive that has killed nearly 900 people in the Gaza Strip.

Infantry units backed by tanks pushed deeper into Gaza's main city, sparking some of the fiercest battles yet of the 16-day-old war Israel launched on the Islamists in response to rocket fire from their stronghold.

But Israeli officials suggested the Jewish state was nearing the end of its deadliest ever offensive in the Palestinian enclave, despite having last week waved off a UN Security Council resolution calling for a halt to the fighting.

"The decision of the (UN) security council doesn't give us much leeway," Deputy Defence Minister Matan Vilnai told public radio. "Thus it would seem that we are close to ending the ground operation and ending the operation altogether."

Earlier Prime Minister Ehud Olmert said the Jewish state was nearing the goals it had set for its operation, but said fighting would continue for the time being.

"Israel is approaching these goals, but more patience and determination are required in order to reach these goals" and "change the security reality in the south in a way that will allow our citizens to live in security and stability over a long period of time," Olmert said at the start of the cabinet meeting.

Both Israel and Hamas last week brushed off the UN Security Council resolution that called on both sides to stop fighting, and the early Sunday hours saw Israeli troops push deep into the territory's main population centre.

Troops crept into the southern Tal al-Hawa neighbourhood in the early morning hours, encountering roadside bombs, mortar and gunfire from Palestinian fighters, witnesses said.

The troops withdrew at daybreak, but hundreds of panicked residents fled from the area, clutching small children and hurriedly-packed bags after a sleepless night.

"We waited until today to flee. We couldn't take anything with us, not even milk for the children," said Ibtissame Shamallah, 22, holding on to two children as she left.

Civilians again fell victim in Israel's offensive in the Palestinian enclave, one of the world's most densely populated places where every other person of the 1.5 million population is under 18 years of age.

Two women and four children were killed in a strike on a house in Beit Lahiya, medics and witnesses said. Twelve bodies were pulled from the rubble in Tal al-Hawa, 10 of them fighters, medics said.

Hamas and its allies fired more than 10 rockets into Israel, with the projectiles slamming as far as 40 kilometres (24 miles) inside the Jewish state, without causing injuries.

Defence Minister Ehud Barak told reporters that Israel was "examining the diplomatic channel" while continuing its offensive.

"There's no contradiction between the two," said Barak, who is due to again send senior aide Amos Gilad to Cairo in the coming days for Egyptian-led talks on ending the war.

Israeli warplanes bombed more than 60 targets throughout the Gaza Strip overnight and into morning, hitting weapons depots and smuggling tunnels as well as a mosque that was allegedly used to store weapons and train fighters, the army said.

In all, at least 26 Palestinians have been killed in clashes on Sunday, medics said.

With the body count spiralling, the exiled political chief of Hamas, Khaled Meshaal, remained defiant, vowing in an address televised late Saturday that the Islamists would not strike a deal on a permanent truce with Israel, a country the group is pledged to destroying.

"We will not accept a permanent truce because , as long as there is an occupation there is a resistance," he said, adding that his group will not hold talks on a temporary truce until Israel stops its offensive.

Since the Israeli offensive began on December 27, at least 885 people have been killed, including 275 children, and another 3,620 wounded, according to Gaza medics.

Ten Israeli soldiers and three civilians have been killed in combat or in rocket attacks since the operation began, as Palestinian militants have fired more than 600 rockets, some of them penetrating deeper than ever inside Israel.

Egypt has been spearheading Western-backed efforts to end the fighting, calling for an immediate truce, opening Gaza's border crossings, preventing arms smuggling and a call for Palestinians to resume reconciliation talks.

A senior Israeli official told AFP that Israel was seeking US guarantees to back up any arrangements to stem weapon smuggling into Gaza.

The conflict has sparked worldwide pro-Palestinian demonstrations, including rallies in Europe that drew tens of thousands of protesters.

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