ISRAEL has vowed to continue its war on Gaza amid fears of a possible Israeli counter-strike against Iran.

The unprecedented attack by Iran on Saturday in retaliation against an Israeli strike on an Iranian diplomatic compound in Syria earlier this month has raised fears of a wider regional war.

Israeli Prime Minister Benjamin Netanyahu met with his war cabinet on Sunday, but no decision has been made on how or when Israel could respond to the Iran attack, with another meeting reportedly set for this Monday afternoon.

But the Israeli military have vowed to continue their assault on Gaza in the interim.

Spokesman Daniel Hagari said late Sunday that they won’t be distracted, adding: "Even while under attack from Iran, we have not lost sight of our critical mission in Gaza to rescue our hostages from the hands of Iran's proxy Hamas."

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The Hamas government media office, meanwhile, said Israeli aircraft and tanks launched "dozens" of strikes overnight on central Gaza, with several casualties reported.

It comes as negotiations meant to bring about a ceasefire in exchange for the release of the hostages appeared to hit a setback on Sunday.

Netanyahu’s office said that Hamas rejected the latest proposal for a deal, which had been presented to Hamas a week ago by mediators Qatar, Egypt and the United States.

A Hamas official said the group wants a “clear written commitment” that Israel will withdraw from the Gaza Strip during the second of a three-phase ceasefire deal.

The deal presented to the sides calls for a six-week ceasefire in Gaza, during which Hamas would release 40 of the more than 100 hostages the group is holding in the enclave in exchange for 900 Palestinian prisoners from Israel’s jails, including 100 serving long sentences for serious crimes.

Hamas welcomed Iran’s attack, saying it was “a natural right and a deserved response” to the strike in Syria and urged the Iran-backed groups in the region to continue to support Hamas in the war against Israel.

Hamas's attack that sparked the war on Gaza resulted in the deaths of 1,170 people, mostly civilians, according to Israeli figures.

Israel's retaliatory offensive, meanwhile, has killed at least 33,729 people in Gaza, mostly women and children, according to the Hamas-run territory's health ministry.