After the missile slammed into the bus, the Palestinians lobbed at least 45 mortar rounds and several rockets into southern Israel, hitting a house, and the army responded by staging multiple raids across the enclave.

Late Thursday, in a bid to prevent further Israeli strikes, Hamas said it had got most armed Palestinian factions in Gaza to sign on to a ceasefire.

As the rockets flew over the border, Israel's Iron Dome short-range missile defence system intercepted a projectile heading for the southern port city of Ashkelon, in what was the first time such a system has ever been successfully used anywhere in a combat situation.

The bus attack was claimed by the military wing of Hamas and was the first time an anti-tank missile from Gaza had hit a civilian target in Israel, prompting Israel to vow a harsh response.

"This situation will be contained," said Prime Minister Benjamin Netanyahu who was visiting the Czech Republic. "We will not shy away from taking all necessary action, offensive and defensive, to protect our country and its citizens."

Hamas's Ezzedine Al-Qassam Brigades, claimed responsibility, saying it was an "initial response" to Israel killing three of the group's leaders on Saturday, when an air strike hit their car in southern Gaza.

An Israeli military spokesman said that raid was a pre-emptive strike against militants planning to attack Israelis on holiday in the Sinai Peninsula during the coming Jewish festival of Passover.

Later, the Hamas government said most of the militant groups in Gaza had agreed to a truce.

"We are in contact with the Palestinian factions to stop the Zionist escalation," the Hamas interior ministry said in a statement.

"We received a positive response from most of the factions," he added, without saying who had not signed up to the deal.

An Islamic Jihad official said the truce would go into effect from late Thursday night and indicated "other Arab countries" had been involved in the talks.

The school bus attack, which was seen by Israel as a worrying escalation, was also condemned by the United States.

"We condemn the attack on innocent civilians in southern Israel in the strongest possible terms," State Department spokesman Mark Toner said.

"We are particularly concerned about reports that indicate the use of an advanced anti-tank weapon in an attack against civilians," he said.

In the West Bank, senior Palestinian Authority official Saeb Erakat called on the world community to stop Israel's "ruthless and illegitimate military operations."

But he also urged Palestinian factions not to give Israel any pretext for further attacks.

A spokesman for the Israeli medical services said a 16-year-old boy was critically wounded in the attack on the bus near the Nahal Oz kibbutz, just across the border from Gaza. The bus driver sustained light injuries.

Television footage showed the yellow bus with the back end badly damaged and the windscreen blown out. A small teddy bear lay on the ground among shards of glass and pools of blood.

The bus had just finished dropping off dozens of youngsters.

Immediately after it was hit, militants in Gaza fired mortar shells rescue workers, an AFP correspondent said.

By early evening, the army said at least 45 mortar rounds and rockets had slammed into southern Israel.

Following the surge in violence, the Israeli military hit back immediately, shelling an area in eastern Gaza City and killing a 50-year-old man and wounding another five people, including a small child.

Air strikes hit two Hamas positions in and around Gaza city, and other raids hit targets in the southern cities of Rafah and Khan Yunis, killing another three people and wounding dozens more, Palestinian medical sources said.

Hamas said one of the dead was a member of it's armed wing. In total, some 34 people were wounded across the Gaza Strip.

A military spokeswoman confirmed that troops had launched multiple attacks on targets in Gaza, saying it "fired at places from which mortars are fired at Israel."

Over the past month, dozens of rockets have hit southern Israel, some reaching cities as far as 40 kilometres (25 miles) away, and prompting a series of retaliatory air strikes and raids.

So far, Israel's response has been muted.

Many believe the Jewish state is reluctant to be dragged into another bloody war with Hamas akin to Operation Cast Lead, the 22-day war which began at the end of 2008 that killed more than 1,400 people in Gaza and 13 Israelis.

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