Israel’s Iron Dome anti-missile system intercepts rockets launched from the Gaza Strip on Sunday. Reuters

Hamas’ assault on Israel drove oil prices higher on Monday as markets priced in fears of a wider conflict in the Middle East, a day after Israel pounded the Palestinian enclave of Gaza in retaliation for one of the bloodiest attacks in its history.

Fighters from Hamas group killed 700 Israelis and abducted dozens more as they attacked Israeli towns on Saturday, the deadliest incursion into Israeli territory since Egypt and Syria's attacks in the Yom Kippur war 50 years ago.

In response, Israeli air strikes hit housing blocks, tunnels, a mosque and homes of Hamas officials in Gaza on Sunday, killing more than 400 people, including 20 children, in keeping with Prime Minister Benjamin Netanyahu's vow of "mighty vengeance".

Israeli military spokesperson Lieutenant Colonel Jonathan Conricus said the country had called in around 100,000 soldiers.

"Our job is to make sure that at the end of this war, Hamas will no longer have any military capabilities to threaten Israeli civilians with, and in addition to that we also need to make sure Hamas will not govern the Gaza Strip," he said.

The violence fuelled volatility on global markets on Monday, with concerns about possible disruptions to supplies from Iran, helping to drive Brent crude up $4.18, or 4.94%, to $88.76 a barrel by 0120 GMT in Asian trade.

Iran is an ally of Hamas and while it congratulated Hamas on the attack, its mission to the United Nations said Tehran was not involved in the attacks.

Palestinians inspect the destruction in a neighbourhood heavily damaged by Israeli airstrikes on Gaza on Monday. AFP

Beyond blockaded Gaza, Israeli forces and Lebanon's Iran-backed Hezbollah militia exchanged artillery and rocket fire on Sunday, while in Egypt, two Israeli tourists were shot dead along with a guide.

Appeals for restraint came from around the world, though Western nations largely stood by Israel, while Iranian President Ebrahim Raisi telephoned the Hamas chief to congratulate him for the "victory" and Hezbollah and protesters in various Middle Eastern nations lauded Hamas.

In southern Israel on Sunday, Hamas gunmen were still fighting Israeli security forces more than 24 hours after their surprise, multi-pronged assault of rocket barrages and bands of gunmen who overran army bases and invaded border towns.

"My two little girls, they're only babies. They're not even five years old and three years old," said Yoni Asher who recounted seeing video of Palestinian gunmen seizing his wife and two small daughters after she took them to visit her mother.

Uri David told a news conference he spent 30 minutes on the phone with his two daughters, Tair and Odaya, during an attack until they no longer responded to him and that he did not know their fate.

"I heard shooting, shouting in Arabic, I told them to lie on the ground and hold hands," he said, breaking down in tears.

Captives

Israel's military, which faces awkward questions for not thwarting the attack, said it had regained control of most infiltration points along security barriers, killed hundreds of attackers and taken dozens more prisoner.

Israeli air strikes on Gaza destroyed Hamas' offices and training camps, but also houses and other buildings. The Palestinian health ministry said 413 Palestinians, including 78 children, were killed and 2,300 people wounded since Saturday.

Palestinians react as an Israeli military vehicle burns after Palestinian gunmen hit it on Saturday. Reuters

"As an occupying power, Israel has no right or justification to target the defenceless civilian population in Gaza or elsewhere in Palestine," the Palestinian foreign ministry said, denouncing a "barbarous campaign of death and destruction".

Hamas fired more rocket salvoes into Israel on Sunday.

The Israeli military said it had deployed tens of thousands of soldiers around Gaza, a narrow strip of land that is home to 2.3 million Palestinians, and was starting to evacuate Israelis around the frontier.

"This is my fifth war. The war should stop. I don't want to keep feeling this," said Qassab al-Attar, a Palestinian wheelchair user in Gaza whose brothers carried him to shelter.

Israel has not released an official toll but its media said at least 700 people were killed in Saturday's attacks, children among them. Military spokesperson Daniel Hagari called it "the worst massacre of innocent civilians in Israel's history."

Reuters