Residents of the northern Gaza Strip had reported exchanges of fire between Israeli soldiers and Hamas militants during the temporary truce period. In the city of Gaza, hundreds had taken to the streets during the hiatus, shopping and visiting relatives.
Meanwhile both sides said they were studying an Egyptian proposal for a ceasefire. This came as international pressure mounted against Israel over its12-day-old assault following the deaths of 42 Palestinians at a UN school in the coastal enclave.
While it ordered a three-hour-long lull in "offensive" military operations to let in aid, Israel said it was considering a major escalation that would push troops deep inside Gaza's cities and refugee camps in their bid to end rocket salvoes into Israel by Islamist militants.
In earlier fresh fighting, 12 Palestinians were killed by Israeli attacks in the Gaza Strip, medical workers said. At least eight Hamas rockets hit southern Israeli, causing no casualties.
The United Nations called for an inquiry into Israel's deadly shelling of a school in Jabalya refugee camp on Tuesday. Israel said Hamas militants at the school had fired rockets. The UN said there were no gunmen on the premises.
"There are ongoing contacts with the relevant parties as to the parameters of a sustainable quiet that must include the total cessation of all hostile fire from Gaza into Israel, and the complete ending of arms smuggling into the Gaza Strip," said Mark Regev, Israeli Prime Minister Ehud Olmert's spokesman.
Another Israeli official, speaking on condition of anonymity, described the Egyptian ceasefire proposal as "a work in progress" and said negotiations were under way over details.
Around mid-day, Israel put its military operations in parts of the Gaza Strip on hold, saying the three-hour break would enable aid to flow through a "humanitarian corridor" it had established.
Hamas said it, too, would hold rocket fire temporarily.
John Ging, director of operations in Gaza for the United Nations Relief and Works Agency (UNRWA), said Gaza had become "hell on earth" for its 1.5 million inhabitants and a three-hour lull was insufficient, given their needs.
"Let's stop the fighting, not just for three hours but for 24 hours a day," Ging told Sky Television.
More than 600 Palestinians have been killed in the fighting. According to UN figures more than a quarter of the Palestinian dead are civilians. A Palestinian human rights group put the figure at 40 percent.
Israeli government sources said members of Olmert's security cabinet were likely to defer a vote on starting an urban warfare stage of the offensive, which began with air strikes on 27 December and moved into a ground offensive last Saturday, and give Egypt's ceasefire efforts a chance.
A Palestinian official said the Gaza Strip's Hamas rulers, who want an end to Israel's blockade of the enclave, had been briefed in Egypt by President Hosni Mubarak and were debating the proposal.
Israel, which has lost seven soldiers and three civilians in the conflict, wants a specialised international force to search out and destroy tunnels along the border between Gaza and Egypt to prevent Hamas from rearming.
On a frequency used by a radio station in the Gaza Strip, an announcer, saying he was speaking on behalf of the Israeli army, warned residents of the southern town of Rafah to leave their homes by 8am on Thursday.
He said the Israeli military would destroy a number of homes it believes are built on top of shafts leading to tunnels.
As today's three-hour lull took hold, the northern Gaza Strip was at its quietest since the offensive began, said a Reuters reporter on the border with Israel.
Residents of Gaza City reported hearing heavy machine gun fire but the source was not immediately clear.
Mubarak made his ceasefire call at a joint news conference in Egypt with French President Nicolas Sarkozy. He gave little detail, but diplomats have described a process that would focus on bringing in foreign forces to seal the Egypt-Gaza border against Hamas arms smugglers while easing other trade routes.
Israeli government sources said Egypt was seeking an initial 48-hour ceasefire, during which it would put the finishing touches to its plan. Israel, the sources said, opposed a preliminary truce and wanted all the details of a ceasefire agreement completed first.
With Washington in a transition period ahead of the 20 January inauguration of President-elect Barack Obama, France and its European partners, with backing from U.S. allies in the Arab world, have been pushing hard for Israel to cease fire.
US Secretary of State Condoleezza Rice endorsed Mubarak's proposal and said a "sustainable" ceasefire should involve both closing off Hamas's ability to rearm and easing the lives of the 1.5 million people of the Gaza Strip by reopening trade routes.
"We need urgently to conclude a ceasefire that can endure and that can bring real security," Rice told the Security Council.
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