The Israeli defence minister has said he "regrets" the deaths of Egyptian policemen on the Gaza border, as Cairo considers recalling its ambassador.
Without confirming Israeli forces had killed the five policemen, Ehud Barak said he had ordered a joint inquiry to be held with the Egyptian army.
Israeli forces had pursued militants after attacks on Thursday, he said.
A rocket killed one person and injured at least four in the Israeli city of Beersheba on Saturday.
Israeli sources identified it as a Grad rocket, adding that two children were slightly injured when Grads hit another town, Ofakim.
Hamas militants have confirmed they fired missiles Grad missiles at Ofakim, in retaliation for Israeli attacks this week, AFP news agency reports. There was no immediate comment on the Beersheba attack.
Since Thursday's attacks, Israeli aircraft have repeatedly attacked targets in the Gaza Strip, while Palestinian militants have fired more than 20 rockets into Israel.
In Cairo, the deaths of the Egyptian policemen prompted angry crowds to gather in protest outside the Israeli embassy.
The Egyptian cabinet spokesman Mohammed Hegazy told the BBC that Cairo had not yet taken a decision to withdraw its ambassador from Tel Aviv, contrary to earlier reports quoting a cabinet release.
That statement had said Egypt was recalling its ambassador until Israel explained why it had reportedly shot the policemen. It said Cairo held Israel politically and legally responsible for the deaths.
But Mr Hegazy said the statement was a "draft" and not finalised.
The latest violence began on Thursday when gunmen attacked Israeli civilian buses near the Red Sea resort of Eilat, killing eight people.
Egyptian officials say Israeli forces chased the suspected militants across the border, and a number of people were killed - including the policemen.
Tensions between Israel and Egypt have escalated sharply, the BBC's Yolande Knell reports from Jerusalem.
Their 30-year-old peace treaty was already being tested after the long-time Egyptian leader, Hosni Mubarak, was forced from office earlier this year, our correspondent says.
'Erosion of order'
Mr Barak said he had held special consultations with the Israeli chief of staff and other intelligence officers.
"The [Eilat] attacks came from the Gaza Strip," he said. "Most of the perpetrators were killed and the senior figures who ordered the terror attacks were targeted shortly afterwards."
Emphasising the importance of the peace accord with Egypt, he said: "Israel regrets the death of Egyptian policemen during the terror attacks."
He promised that, on the basis of the joint investigation, "appropriate conclusions" would be drawn.
Hundreds of Egyptians protested outside the Israeli embassy in Cairo on Friday night and early on Saturday, burning the Israeli flag and demanding the expulsion of the Israeli ambassador.
Under Mr Mubarak, ties between the two nations had been stable after a history of conflict.
But Mr Mubarak's removal has sparked fears among Israeli officials that a less amenable government could take charge in Cairo.
And correspondents say the Sinai desert region of Egypt has become increasingly lawless since Mr Mubarak was ousted, with a rise in militant activity inspired by al-Qaeda.
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