GAZA CITY, Gaza Strip - Israeli ground forces made their deepest foray yet Sunday into Gaza's most populated area.

Tanks rolled into residential neighbourhoods and infantry fighting heightened in streets and buildings with Hamas militants keeping up their rocketing of southern Israel.

An Israeli army spokeswoman said residential neighbourhoods in Gaza are riddled with homemade bombs and booby traps, including mannequins placed at apartment entrances.

They're being put there to simulate militants and are rigged to explode if soldiers approach.

Israeli army spokesman Major Avital Leibovich says the army is advancing more into urban areas.

He says it's being done because that's where Hamas militants are holed up.

Late Sunday, dense plumes of smoke from explosions rose over Gaza City and heavy gunfire was heard just south of the city.

Early Monday, Israeli navy gunboats fired more than 25 shells at Gaza City, setting fires and shaking office buildings, including the local bureau of The Associated Press.

The military said that in general, the targets are Hamas installations but had no immediate information about the shelling that began just after midnight.

Gaza medical officials say at least 870 Palestinians, about half of them civilians, have been killed in the conflict that began Dec. 27.

It began with Israeli air strikes on Hamas buildings, as well as suspected rocket launch sites and smuggling tunnels on the Egyptian border.

Thirteen Israelis, including 10 soldiers, have died.

German and British envoys pressed efforts to negotiate an end to the war even though Israel and Hamas have ignored a UN Security Council resolution calling for an immediate and durable ceasefire.

Outgoing Prime Minister Ehud Olmert said Israel had made progress in its objectives in the Gaza offensive but was not finished yet.

"Israel is nearing the goals that it set for itself," Olmert said. "However, further patience, determination and effort are necessary in order to achieve those goals in a way that will change the security reality in the south."

While Olmert's comment signaled no immediate end to the offensive, it indicated that Israel is wary of an open-ended conflict with an unclear agenda.

Israel wants to end years of rocket attacks by Hamas on its southern population, a complex goal that could require Egyptian or international help in shutting off routes to smuggle weapons into Gaza from Egypt.

Israel has been bombing tunnels that run under the Egypt-Gaza border.

Hamas, in turn, demands that Israel open Gaza's blockaded borders as part of any halt to the fighting.

Such a measure would relieve economic pressure on the destitute territory but also strengthen Hamas's control of Gaza, an odious prospect for Israelis who fear a halt to the fighting will just give Hamas another opportunity to re-arm.

In Cairo, Egypt's state-owned news agency reported progress in truce talks with Hamas, but provided no specifics.

The Middle East News Agency quoted an unnamed Egyptian official as saying talks between the nation's intelligence chief, Omar Suleiman, and Hamas envoys were "positive."

Palestinian medical officials reported about 60 deaths on Sunday, including 17 who had died of wounds suffered on previous days.

Most of those killed Sunday were noncombatants, medical officials said, including four members of one family killed when a tank shell hit their home near Gaza City, and a 10-year-old girl killed in a similar attack.

Palestinian witnesses said Israeli troops moved to within a kilometre of Gaza City's southern neighbourhoods, and even closer to the northern neighbourhood of Sheikh Ajleen.

Firefights in Sheikh Ajleen erupted before dawn as Israeli forces advanced toward Gaza City, home to 400,000 people, Palestinian witnesses said.

The battles were still in progress nearly a full day later, though tanks pulled back, with the Israelis in control of some buildings on the neighbourhood's outskirts.

"We are safe, but we don't know for how long," said Khamis Alawi, 44, who huddled with his wife and six children in their kitchen overnight. He said bullets riddled his walls and several came in through the windows.

Military analysts say Israeli troops are probing territory, clearing buildings and moving around regularly, rather than digging into positions that would allow Hamas militants to get a fix on their whereabouts and lay ambushes.

Israel risks losing the advantage of armor and heavy firepower in urban settings that the militants know well.