Hundreds of Israeli troops were searching the Zeitoun area of Gaza City for the remains of the soldiers and prime minister Ariel Sharon promised reprisals for the deaths. An emergency session of the security cabinet was convened last night to discuss further action, after some of the worst clashes for many months in Gaza.
"We are checking every roof and every balcony in order to locate the ... bodies of our soldiers. Our commitment is to bring them to burial in Israel," said the regional commander, Major General Dan Harel.
Al-Jazeera, the Arabic TV channel, broadcast a video which it said showed two Islamic Jihad militants displaying the head of an Israeli soldier. Hamas militants were shown on Israeli TV with body parts collected from the scene of the blast.
"We are not conducting any negotiations," said the Israeli military commander Lieutenant General Moshe Yaalon. "We will show no forgiveness toward those who are responsible."
The soldiers were killed during a lightning raid which went wrong when Hamas fighters lured an Israeli armoured personnel carrier on to a landmine.
The biggest loss of Israeli troops in the Gaza Strip since the beginning of the intifada in October 2000 will reignite debate over Ariel Sharon's intention to withdraw from settlements there.
The raid was meant to target workshops which manufacture homemade rockets which are fired at the settlements but by mid-morning yesterday it became a full-scale invasion. Seven Palestinians were killed and more than 120 injured.
Zeitoun shuddered all day with heavy explosions and black smoke drifted across the skyline. Apache helicopters circled the area in pairs, provoking panic among Gazans.
The streets echoed with gunfire as Israeli tanks tried to dislodge gunmen and snipers tried to detonate homemade roadside mines.
In one street gunmen attempted to lure a tank from an alleyway into the range of two rocket-propelled grenade launchers. The tank crew realised and remained undercover and called in missile strikes from the overhead helicopters.
Scores of Palestinian gunmen swarmed around the frontlines, some in uniform and others in casual clothes. One gunman who carried an M-16 rifle said he had fought all morning and was returning to fight for the afternoon.
"We can't do anything against tanks with these guns so we wait for the Israelis to get out and then we shoot at them. We have other resources to deal with tanks," he said.
Not far from the fighting a Hamas gunman waved a black plastic bag at a crowd and pulled out a blackened leg severed from below the knee, apparently belonging to one of the dead Israeli soldiers.
He said: "We are going to use these body parts to negotiate with the Israelis for the liberty of our brothers. We have the heads, the kidneys, the legs and other bits of Israeli trash.
"They say that they will stay until they recover these parts. That is our first victory because we welcome the opportunity to kill more of them," he said.
In January, Israel freed 431 prisoners in return for one living Israeli and the remains of three soldiers killed in a border raid by Lebanon's Hizbullah guerrillas in 2000.