Prime Minister Benjamin Netanyahu ordered defence forces to "take off the gloves" and prepare for a possible full-scale ground invasion of Gaza amid escalation of violence.
The Israeli military said it has foiled an attempt by Palestinian militants to infiltrate southern Israel by sea and killed four attackers today. One Israeli soldier was injured.
Israeli television stations said a rocket has targeted Tel Aviv but was intercepted by "Iron Dome" defense system.
Earlier, Israel Defence Forces chief of Staff Lt Gen Benny Gantz requested the call-up of 40,000 reserves in order to replace conscripted forces in the West Bank, and enable their deployment to the Gaza border.
The Prime Minister's Office did not confirm reports that the security cabinet approved the request which was made hours after Operation Protective Edge was launched in an effort to quell rocket fire from the Gaza Strip, Jerusalem Post said.
Netanyahu held a high-level meeting with Defence Minister Moshe Ya'alon, Chief of Staff Gantz and Israel's internal security agency Shin Bet's Chief Yoram Cohen.
"Hamas chose to escalate the situation and it will pay a heavy price for doing so," Netanyahu said during the meeting.
Netanyahu said that the time had come to "take off the gloves" against Hamas.
"The Prime Minister's instruction by the end of the meeting was to prepare for a thorough, long, continuous and strong campaign in Gaza," a senior official said.
"The Prime Minister instructed the army to be ready to go all in. A ground offensive is on the table," he added.
The decision comes in the wake of foreign minister Avigdor Lieberman, leader of the ultranationalist Yisrael Beitenu party, snapping a 20-month-old alliance with the ruling Likud Party yesterday, over the fractious coalition's response to frequent attacks by Hamas.
Operation Protective Edge, which has seen airstrikes targetting 100 Hamas positions in Gaza, came after more than 250 rockets were fired into southern Israel in recent weeks.
Palestinian witnesses and health officials said 17 people had been killed and over 100 injured in the Israeli attacks, making it the deadliest day so far in the latest escalation.
An airstrike on a car in Gaza City killed four people, Palestinian medics said. It came shortly after another air strike killed a Palestinian in central Gaza.
In a separate incident, a missile slammed into a house in the southern city of Khan Yunis killing seven people and wounding 25 others, medics said.
In a response, Hamas has declared all of Israel as potential target for the retaliation.
Palestinian president Mahmud Abbas today demanded immediate halt of all military operations against Gaza.
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