It was the first major ground incursion into Gaza since Israel pulled out of the impoverished coastal strip last year in a highly controversial operation that ended a 38-year occupation.
"We decided to use extreme means to bring Gilad (Shalit) home and we have no intention of reoccupying the Gaza Strip," Prime Minister Ehud Olmert was quoted as saying in by public radio referring to the 19-year-old conscript. "Last night's operation will continue. No one who is involved in terror will be immune. We have one central goal: to bring Gilad home."
Much of Gaza was plunged into darkness after war planes waged night-time strikes to blow up a power plant and three bridges as militants prepared for an invasion by building barricades and blocking roads.
Before dawn, tanks, armoured cars and bulldozers rolled several kilometres (miles) into southern Gaza, where the missing soldier was believed to be held, pushing into the disused international airport near Rafah. No casualties were reported.
The move followed intensive efforts to free Shalit after his seizure in an attack Sunday that killed two soldiers and was claimed by three groups including fighters loyal to Hamas. Israeli planes later raided a Hamas training camp in Rafah.
White House spokesman Tony Snow backed Israel's "right to defend itself" and blamed Hamas for the incursion, but urged Israel to ensure "innocent civilians are not harmed." EU External Relations Commissioner Benita Ferrero-Waldner urged both sides to end hostilities.
They "need to step back from the brink before this becomes a crisis that neither can control," she said in a statement. Palestinian prime minister Ismail Haniya condemned Washington for "giving the green light to (Israeli) aggression," which he demanded Israel stop before the situation worsened.
"The Israeli occupation must put an end to its aggression before the situation gets complicated and the crisis gets worse," he said, adding that he hoped a "positive result" could be found.
Four Israeli warplanes overflew the presidential palace of Syria's Bashar al-Assad, breaking the sound barrier in a move a military spokeswoman said was "due to the support and protection Syria gives Hamas."
Public Security Minister Avi Dichter even issued a direct threat to kill Hamas chiefs in Syria, the base of the movement's political supremo, Khaled Meshaal, who escaped a Mossad attempt on his life in Amman in 1997.
He said Israel had warned Syria about the presence of Hamas and Islamic Jihad leaders in Damascus but was ignored. "This therefore gives Israel full permission to attack these assassins."
Armed groups have vowed not to release the soldier until all Palestinian women and children are freed from Israeli jails, a demand rejected by Olmert who ordered tanks and a force of about 5,000 troops to mass on the Gaza border.
But a Palestinian foreign ministry spokesman later said his government was seeking a deal for the soldier's release in exchange for freeing Palestinian prisoners.
"We have sent letters to the foreign ministries of Arab governments asking them to support a negotiated solution that includes the exchange of Palestinian detainees imprisoned by the Israeli occupation for the kidnapped Israeli soldier," Taher Nunu said.
The situation was further complicated when a Palestinian group claiming to hold the soldier also threatened to kill a Jewish settler it said it had abducted in the West Bank. "Unless the aggression stops, we will kill the settler," said a representative of the Popular Resistance Committees, which claimed Sunday's attack along with the armed wing of Hamas and another group.
The Al-Aqsa Martyrs Brigades, an offshoot of the moderate Fatah faction, said it had kidnapped another Israeli settler, a 62-year-old man, although it was not possible immediately to confirm the report.
Amnesty International called for all hostages to be released and for "an end to the wanton destruction and collective punishment being carried out by Israeli forces in the Gaza Strip."
It said "destruction of three bridges and electricity networks ... have left half the population of the Gaza Strip without electricity and have reportedly also adversely affected the supply of water."
The soldier's capture has triggered the worst Middle East crisis since Hamas took office in March after an election that sent shockwaves throughout Israel and the West.
It also presented the first major challenge for Olmert since he took office in May pledging to unilaterally redraw the map of Israel even without negotiations with the Palestinians. Egypt, France and the Vatican, as well as the United States, had sought to exert pressure on the Palestinians to hand over the soldier.
Hamas held an urgent Palestinian cabinet meeting in a bid to find an end to the standoff, with deputy prime minister Nasserdine al-Shaer calling on the kidnappers to "preserve his life."
Government spokesman Ghazi Hamad said the offensive was unjustified "military madness" and accused Israel of seeking to cause "chaos and provoke a new bloody conflict". Sunday's attack, which saw gunmen tunnel their way into Israel, has raised questions over possible military and intelligence failings.
Tensions have long been mounting, with Israel and the West financially and politically boycotting Hamas as a terror group, plunging the territories into a deep crisis. Past history of soldiers abducted at the hands of Palestinians bodes ill for Shalit, with all nine such previous cases ending in death.
PAKISTAN CONDEMNS Pakistan on Wednesday regretted "incursion" and "total blockade" of the Gaza Strip by Israel and urged the international community to take steps to resolve the crisis through peaceful means.
A statement released by the Foreign Office reacting to reports of destruction of Palestinian infrastructure said, "We are concerned over the escalation of hostilities between Israel and Palestine, which would further impede the international efforts to stop the violence and restart the negotiations."
Israel early on Wednesday launched an air and ground offensive against Palestinian guerrillas to recover its abducted soldier.
Pakistan hopes that the international community would take necessary steps to help resolve the crisis through peaceful means.