Israel has given the army a green light to launch a deeper incursion into northern Gaza, though there was no indication when it might begin, the Maariv newspaper reported.

"Hamas well understands ... that the sky will fall on them if they harm Gilad Shalit," Israeli Interior Minister Roni Bar-On said.

"LONG WAR"

"This is a long war," Olmert said. "It requires lots of patience, sometimes endless restraint. We have to know when to clench our teeth and to deal a decisive blow."

Washington has been urging Israel to show restraint and take steps to minimize civilian casualties.

Hamas has accused Israel of trying to topple its three-month-old government, which the Jewish state and Western powers have pushed to the brink of financial collapse by cutting off aid.

The smallest of the three militant groups, the previously unknown Islamic Army, said there would be no further information released on 19-year-old Shalit, who was seized in a cross-border raid on June 25.

"Whether he will be killed or not killed, we will not disclose any information," said Islamic Army spokesman Abu al-Muthana. He later added: "We do not kill captives. Our Islam requires that we treat captives well and fairly."

Israel has said it will hold moderate Palestinian President Mohammed Abbas and the Hamas-led Palestinian Authority (PA) responsible for Shalit's safety.

"Gilad Shalit is alive," said David Baker, a spokesman for Olmert's office. "The PA must bring about his immediate and unconditional return to Israel."

Israel has hinted it could assassinate leaders of Hamas if Shalit is not freed. "None of them will be immune," Olmert said.

Hamas, which advocates Israel's destruction, does not want to lose face by freeing Shalit without getting something in return. Israel says it does not want to set a precedent that could lead to more abductions.

Israeli security sources said a commando raid to try to rescue Shalit remained an option but would be risky in Gaza's maze of alleyways. The last Israeli soldier abducted by Palestinians was killed in a failed rescue bid in 1994.

(Additional reporting by Allyn Fisher-Ilan, Corinne Heller, Adam Entous and Jeffrey Heller in Jerusalem)