It said the military's campaign against the Islamists was also aimed at "taking out" the group's senior leadership including top government officials.

"We are waiting to see what our political leadership decides about a potential ground" incursion, army spokesman Richard Hecht told journalists.

"This has not been decided yet... But we are preparing for a ground manoeuvre if it is decided."

The army has deployed tens of thousands of troops to the border with the Gaza Strip as it continues a withering air campaign it says targets Hamas infrastructure, commanders and operating centres in the enclave.

The air strikes came in response to a surprise air, land and sea assault on Saturday by Hamas fighters that left more than 1,200 people killed in Israel.

Until now Hamas has fired more than 5,000 rockets at Israel, according to the army.

Israel's air campaign has also so far left at least 1,354 people dead in the Gaza Strip, according to the latest toll from the Hamas-affiliated health ministry.

"We are preparing ourselves for the next stages of war... to prepare for multiple operative contingency plans," Hecht said.

He said the possible operation "could be from the air, it could be combined from the sea (and) air".

Israel's assault is targeting senior leaders of Hamas, Hecht said, including the group's chief in Gaza, Yahya Sinwar.

"Right now we are focused on taking out their senior leadership, not only the military leadership (but) also their governmental leadership, all the way up to Sinwar," Hecht said.

"They were directly connected" to the weekend attack, he added.

In a separate briefing to reporters, chief military spokesman Daniel Hagari reiterated the army's plans against the Islamists.

"We are crushing Hamas' ability to function as sovereign," Hagari said.

"It is already failing to run Gaza in some areas," he continued, adding that they would continue to target the group until it is no longer able to rule "in all of Gaza".

On Thursday, Israel and Hamas traded more fire, with AFP journalists witnessing several air strikes targeting two Palestinian refugee camps in the Gaza Strip.

"Whoever approaches the fence will be killed," Hagari said.

Israel has also imposed a "complete siege" on the Palestinian territory, cutting off electricity, water and fuel supplies into Gaza.

Israeli Energy Minister Israel Katz said earlier on Thursday that the supplies would not be resumed until Hamas militants free all the hostages held in the Gaza Strip.