Defense Minister Shaul Mofaz promised a war "to the bitter end" against Hamas, and the Israeli Cabinet reiterated there would be no progress on the U.S.-backed peace plan unless the Palestinian Authority takes action against the militants.
Israel's army chief, Lt. Gen. Moshe Yaalon also told the Cabinet he was prepared to launch a ground invasion into the Gaza Strip if necessary, according to a statement.
Also Monday, Palestinian officials trying to mediate between veteran Palestinian leader Yasser Arafat and his beleaguered prime minister, Mahmoud Abbas, said the two are no longer on speaking terms.
Arafat and Abbas, one shunned and the other backed by the United States, are locked in a power struggle that further jeopardizes the already troubled U.S.-backed "road map" peace plan.
Israel says it will not negotiate with a Palestinian government handpicked by Arafat, should the unpopular Abbas be ousted in a parliament vote, possibly as early as next week.
Abbas has failed to reach two major objectives, persuading Palestinian militants to halt violence and improving the daily lives of his people through progress on the road map.
His standing has been further undermined by Israel's relentless strikes against Hamas in retaliation for an Aug. 19 bus bombing that killed 21 people in Jerusalem.
Since the bombing, Israel has killed 14 Palestinians, including 11 Hamas members and three bystanders, in six missile attacks.
In Monday's strike, Israeli helicopters fired missiles at a car carrying three Hamas militants, killing one and wounding a second, while the third got away. Twenty-five bystanders were also hurt.
The dead man was identified as Khader Houssre, a 36-year-old Hamas member.
The missiles hit as the car drove along a crowded side street in downtown Gaza City. "I rushed outside, and saw a car like a ball of fire," said witness Salman Abu Nur, 42, a printer.
The militants in the car had been firing rockets at Israeli towns and Jewish settlements, Israeli Foreign Ministry official Gideon Meir said.
A Hamas leader, Abdel Aziz Rantisi, denounced the strike as "a brutal crime" and said the group would retaliate.
Mofaz, the defense minister, told Israel's Cabinet that the Jerusalem bus bombing changed the rules of the conflict. Israel will now "fight to the bitter end" against Hamas, Mofaz said, according to a statement summarizing his remarks.
Yaalon, the army chief, told the ministers he was prepared to launch a ground invasion into the Gaza Strip if necessary.
Yaalon was not referring to a broad invasion that would require drafting reserve troops, but rather a smaller-scale operation using up to one brigade, or some 3,000 troops, Cabinet Secretary Yisrael Meimon said.
In the past three years of fighting, Israel has carried out several ground offensives in Gaza but has shied away from reoccupying large areas of the densely populated coastal strip, focusing instead on air strikes.
In the past two years, Palestinian militants in the Gaza Strip have fired dozens of rockets at Israeli settlements and border towns, causing minor damage and injuries.
Israel considers the rockets a strategic threat, and the Defense Ministry said it plans to build 40 to 50 bunker-type rooms for Gaza settlers to protect them from rockets and mortars.
In Cairo, meanwhile, the Abbas government resumed truce talks with Hamas, despite the prime minister's pledge after the Jerusalem bus bombing to cut off contacts with the militants.
Palestinian militants had declared a unilateral cease-fire June 29, but later changed the terms, saying they would retaliate for the killing of activists by Israeli troops.
In the West Bank, troops critically wounded a 15-year-old Palestinian in a clash with hundreds of stone-throwing youths in the city of Nablus, a hospital doctor said.
In the incident, a firebomb was thrown at a tank, setting off a fire, and soldiers responded with shots from a machine gun, said a Palestinian medic, Ala Aratrut.
The Israeli military had no official comment.