Israeli bulldozers have demolished at least two homes in the Palestinian-controlled Rafah refugee camp in the southern Gaza Strip.
The Israeli military said an army post nearby had earlier been attacked with gunfire and hand grenades but that there were no casualties. Palestinians said the occupants of the buildings had fled before the demolitions.
Almost a month of relative calm was shattered on Wednesday when Hamas fighters burst into an Israeli army post near the Gaza Strip, killing four soldiers. Two Hamas members died in the attack.
Israel promised retaliation after the attack as Hamas said it would no longer agree to honour Palestinian Authority chairman Mr Yasser Arafat's call for an end to violence.
Mr Arafat condemned the attack and said his government would "be relentless against this challenge of the national consensus on the ceasefire".
But Israel insisted Mr Arafat was to blame because he failed to crush the militant groups.
The Israeli response was to demolish two Palestinian security positions and close down three Palestinian naval police stations in the southern Gaza Strip, not far from the scene of the attack, the army said.
Prime Minister Mr Ariel Sharon said Israel would stick to its principle of retaliating for every attack, Israeli TV reported.
In a briefing, a senior Israeli security official told the Americans there was "compelling evidence" that Mr Arafat was involved in a shipment intercepted last week containing, the Israelis claim, 50 tonnes of explosives and arms for use by Palestinian militia.
The Bush administration believes Mr Arafat may have been in a position to know about at least some aspects of the operation, a US official said.
A senior Israeli security official said members of Hezbollah, the Lebanon-based guerrilla group also fighting the Israelis, loaded the weapons at Kish, an island off the Iranian coast, on December 11th. PA