Haniya urged both sides to stop military operations, which began after Corporal Gilad Shalit was seized two weeks ago.

"In order to get out of the current crisis, it is necessary that all parties restore calm on the basis of mutually stopping all military operations, " Haniya said. His Hamas government also urged Israel to open negotiations over the fate of Shalit.

But Israel dismissed the truce offer, saying Hamas must first release the soldier and halt all rocket attacks on Israel. Earlier, Israel said its troops had left their positions in the northern tip of the Gaza Strip and returned to the Israeli side of the border. Israeli forces remain in southern Gaza, as well as east of Gaza City.

The Israeli army said all the forces that entered northern Gaza late on Wednesday had left the town of Beit Lahiya and were back in Israel. It was not clear why Israel has decided to leave now, but it should ease tensions.

This leaves Israeli forces in the southern Gaza strip, as well as east of Gaza City. The latter area was the scene of the latest Israeli operation when troops, backed by helicopter gunships, moved on the eastern outskirts of Beit Hanoun and the main commercial crossing at Karni.

The area is a Hamas stronghold, and three Palestinians are reported to have died in the fighting. Israeli military sources said this was a limited operation, aimed at uncovering tunnels under the border.

Earlier, Hamas confirmed for the first time that Shalit, 19, was alive and was being treated well and humanely. He was seized in a border raid on 25 June The EU accused Israel of using "disproportionate" force and of making a humanitarian crisis worse during operations in Gaza.

UN secretary general Kofi Annan appealed to both sides "to pull back from the brink for the sake of all civilians in the region".

Palestinian president Mahmoud Abbas called both for militants to release Shalit and for Israel to free Palestinian prisoners. "The world must stop this aggression and this inhumane invasion so that our [mediation] efforts can get somewhere, " he said.

Israel's incursion into Gaza is its biggest military operation there since it ended its 38-year occupation nine months ago.

Meanwhile, Iran's president Mahmoud Ahmadinejad has warned that Israel's offensive in the Gaza Strip could cause an "explosion" in the Islamic world. So far, however, Arabs have staged only small and sporadic demonstrations and their governments have made few complaints.

In a speech to thousands of people at a proPalestinian rally in Tehran this weekend, the president warned Israel's western allies that Israel's incursion could provoke an angry response from the world's 50-odd Muslim nations.

"They should not let things reach a point where an explosion occurs in the Islamic world, " he said.

"If an explosion occurs, then it won't be limited to geographical boundaries. It will also burn all those who created (Israel) over the past 60 years."