A Palestinian woman clutches a banknote as she walks next to a building destroyed by an Israeli air strike in Rafah refugee camp southern Gaza Strip Thursday. (Khaled Omar/Associated Press)

Israeli forces opened fire on the United Nations headquarters in Gaza City Thursday, setting the compound ablaze and destroying tonnes of humanitarian aid meant for victims of the 20-day conflict.

"It's a total disaster for us," said John Ging, director of the United Nations Relief and Works Agency in Gaza, whose compound was providing refuge to about 700 Palestinian civilians at the time of the attack.

Israeli shells first struck a courtyard before landing on garages and the UN's main warehouse. The final strike sent thousands of tonnes of food aid up in flames, Ging said. Fuel supplies were later ignited by the blaze, unleashing giant plumes of black smoke into the air.

Three people were injured in the attack.

Troops responded to attack: Olmert

Israeli Prime Minister Ehud Olmert said troops shelled the compound after coming under fire from militants inside its perimeter.

While he described the shelling as a "sad incident," Olmert said Israeli forces "were attacked from there and the response was harsh."

A senior Israeli military officer, speaking on condition of anonymity, said troops opened fire after militants inside the compound shot anti-tank weapons and machine guns.

Ging dismissed the claim as "nonsense."

A spokesman for UNRWA, Johan Eriksson, said Israel is fully aware of where UN buildings are located throughout Gaza.

Israel's Foreign Minister Tzipi Livni shakes hands with UN Secretary General Ban Ki-moon prior to a meeting in Tel Aviv Thursday. (Lefteris Pitarakis/Associated Press)

"They know — they had the exact GPS co-ordinates of all our installations and indeed our main compound.… We say it flat out, this is unforgivable conduct," Erickson said.

The UN compound includes the UNRWA headquarters, as well as a school and other offices.

The UNRWA, which distributes food aid to hundreds of thousands in the tiny coastal territory of 1.4 million people, has suspended its operations inside Gaza as a result of the attack, according to reports.

The developments came as UN Secretary General Ban Ki-moon was in Israel trying to promote a ceasefire. Speaking in Jerusalem, the UN chief decried the attack and called for an explanation.

"I [have] conveyed my strong protest and outrage to the defence minister and foreign minister and demanded a full explanation," Ban said.

He said Israeli Defence Minister Ehud Barak told him it was a "grave mistake."

Ban also said the death toll in Gaza has reached an "unbearable" level.

1,100 dead in offensive, Hamas says

The death toll in the conflict, which began Dec. 27, has reached 1,100 according to the Hamas-run Ministry of Health in Gaza. Civilians are said to account for half the fatalities.

Thirteen Israelis, among them 10 soldiers, have been killed since the military campaign started on Dec. 27.

Israeli forces bombarded and then entered the Gaza Strip's main city early Thursday, firing shells into at least three highrise buildings, according to witnesses. Bullets also penetrated a building housing the Associated Press offices, entering a room where two staffers were working but wounding no one.

The army had collected the locations of media organizations at the outset of fighting to avoid such attacks.

Israeli shells also landed next to a UN school in another Gaza City neighbourhood Thursday, wounding 14 people who had sought sanctuary there, medics and firefighters said.

Top Hamas official killed: Israel

Israeli military and security agency officials said they had killed a man considered to be among Hamas's top five leaders in Gaza in the latest attack.

Said Siam, the Hamas interior minister who controlled the group's security forces, was killed while hiding in his brother's home in Gaza City, officials said.

The Israeli officials spoke on condition of anonymity pending a formal announcement by the military. Palestinian medical officials confirmed the house was attacked, but there was no word from Hamas on Siam's fate.

Israeli tanks shelled downtown Gaza City on Thursday and ground troops thrust deep into a crowded neighbourhood for the first time, sending terrified residents fleeing for cover. (Hatem Moussa/Associated Press)

Troops backed by helicopter gunships, tanks and heavy guns were in pursuit of Hamas militants in the Palestinian territory, according to the Associated Press. More than 70 air strikes were launched overnight, including one on a mosque suspected of containing weapons, the BBC reported.

At least 15 rockets were fired by Gaza militants into southern Israel.

The Israeli attacks forced thousands to flee their homes, according to Palestinian witnesses. Some residents were reportedly on the run in their pajamas, while others steered elderly parents in wheelchairs.

Israeli forces had surrounded the densely populated city in recent days, with some tanks and troops occasionally moving deeper into the central neighbourhoods.

Negotiators in Egypt

The latest attacks came after Palestinian militant and political organization Hamas announced it had accepted an Egyptian ceasefire proposal "in principle."

Lead Israeli negotiator Amos Gilad arrived in Cairo Thursday to meet with Egyptian mediators and provide Israel's response to the truce proposal. Israeli government spokesman Mark Regev said Gilad will discuss the "parameters of the end game" with the Egyptians.

Egyptian Foreign Minister Ahmed Aboul Gheit said he would pass on Hamas's position to Israel on Thursday, and that Hamas has responded "positively" to his country's peace initiative.

After Wednesday's talks, Hamas official Salah al-Bardawil told reporters his movement presented a "detailed vision" to the Egyptian leadership of Hamas's ceasefire demands "to end the aggression and lift the injustice on our people in the Gaza Strip."

The specifics related mostly to the reopening of border crossings into Gaza under international supervision. Hamas has repeatedly said that any truce agreement must also include terms to end Israeli attacks and see the complete withdrawal of troops from the Gaza Strip.

Israel has said it will not agree to a truce that would allow Hamas to regroup and replenish its rocket arsenal through smuggling tunnels under its border with Egypt.

"Israel seeks a durable quiet that contains a total absence of hostile fire from Gaza into Israel and a working mechanism to prevent Hamas from rearming," said Mark Regev, a spokesman for Prime Minister Ehud Olmert.

Israel says its military offensive is aimed at bringing an end to Hamas rockets fired from Gaza into the Jewish state's southern towns, and it accuses the militant group of using civilians in Gaza as human shields and exploiting civilian casualties for political purposes.

The UN Security Council passed a resolution last week calling for an immediate end to Hamas rocket attacks and Israeli military action in Gaza.

With files from the Associated Press