Israel on Saturday rejected demands from Gaza Strip gunmen who abducted an Israeli soldier to free 1,000 Palestinian prisoners from its jails as Egyptian-led mediation efforts to free the captive appeared to founder.
A Palestinian official said mediators had reported the soldier was alive and stable after being treated for wounds.
With Israel having sent troops and tanks into southern Gaza and threatening to broaden the offensive unless Corporal Gilad Shalit is freed, moderate Palestinian President Mahmoud Abbas has been in around-the-clock talks with the Hamas government.
Israeli troops and Hamas gunmen clashed inside southern Gaza in one of the worst exchanges of fire since the assault to free Shalit began, but there were no immediate reports of casualties.
"Prime Minister Ehud Olmert has reiterated that there will be no deals, that either Shalit will be released or we will act to bring about his release," said Israeli Foreign Ministry spokesman Mark Regev, responding to the fresh demands.
Shalit's seizure in a raid across Gaza's frontier last Sunday sparked a crisis that has pushed Israeli-Palestinian ties to new lows and dashed any chance peace talks might be revived.
US President George W. Bush said freeing Shalit was key to ending the crisis in Gaza and should be the initial goal, the White House said.
A statement from the militants did not specify that freeing the 1,000 "Palestinian, Arab and Muslim prisoners" and ending Israel's Gaza assault would be in exchange for Shalit's freedom.