Israeli forces bombarded areas of Rafah on Thursday, Palestinian residents said, as Prime Minister Benjamin Netanyahu dismissed US President Joe Biden's threat to withhold weapons from Israel if it assaults the southern Gaza city.

A senior Israeli official said late on Thursday that the latest round of indirect negotiations in Cairo to halt hostilities in Gaza had ended and Israel would proceed with its operation in Rafah and other parts of the Gaza Strip as planned.

Israel has submitted to mediators its reservations about a Hamas proposal for a hostage release deal, the official said.

"If we must, we shall fight with our fingernails," Netanyahu said in a video statement. "But we have much more than our fingernails."

In Gaza, Palestinian groups Hamas and Islamic Jihad said their fighters fired anti-tank rockets and mortars at Israeli tanks massed on the eastern outskirts of the city.

Residents and medics in Rafah, the biggest urban area in Gaza not yet overrun by Israeli ground forces, said an Israeli attack near a mosque killed at least three people and wounded others in the eastern Brazil neighbourhood.

Video footage from the scene showed the minaret lying in the rubble and two bodies wrapped in blankets.

An Israeli air strike on two houses in the Sabra neighbourhood of Rafah killed at least 12 people including women and children.

Among the dead was a senior commander of the Al-Mujahedeen Brigades, his family and the family of another group leader, medics, relatives and the group said.

Israel says Hamas fighters are hiding in Rafah, where the population has been swelled by hundreds of thousands of Gazans seeking refuge from the bombardments that have reduced most of the coastal enclave to ruins.

In the United States, the White House repeated its hope that Israel would not launch a full operation in Rafah, saying it did not believe that would advance Israel's aim of defeating Hamas.

"Smashing into Rafah, in [President Biden's] view, will not advance that objective," spokesperson John Kirby said.

Kirby said Hamas had been pressured significantly by Israel and there were better options to hunt down what remains of the group's leadership than an operation with significant risk to civilians.

Israel's assault on Gaza has killed nearly 35,000 Palestinians and wounded nearly 80,000, most of them civilians, the health ministry in Hamas-run Gaza said.

It launched its offensive in response to a cross-border retaliation campaign by Hamas on Israel on October 7.

Biden on Wednesday issued his starkest warning yet against a full ground invasion in Rafah, telling CNN: "I made it clear that if they go into Rafah...I'm not supplying the weapons."

Israel's ambassador to the United States said the decision to withhold weapons from Israel over Rafah sends the "wrong message" to Hamas and the country's foes.

"It puts us in a corner because we have to deal with Rafah one way or the other," Ambassador Michael Herzog told a Carnegie Endowment for International Peace webinar.

The Israeli military has the munitions it requires for operations in Rafah and other planned operations, chief armed forces spokesperson Rear Admiral Daniel Hagari said.

Israeli armed forces have already killed 50 Palestinian gunmen in east Rafah and uncovered several tunnels, Hagari said. Hamas had no immediate comment.

Talks end

In Cairo, delegations from Hamas, Israel, the US, Egypt and Qatar had been meeting since Tuesday. The talks in Egypt's capital made some headway but no deal was reached, according to two Egyptian security sources.

Izzat El-Risheq, a member of Hamas' political office in Qatar, said the Hamas delegation had left Cairo, having reaffirmed its approval of the mediators' ceasefire proposal. The plan entails the release of Israeli hostages held captive in Gaza and a number of Palestinians jailed by Israel.

Hamas blames Israel for the lack of agreement, and its Al-Aqsa TV's Telegram account said the group would not make any concessions beyond those in the proposal it had accepted.

Israel has said it is open to a truce but has rejected demands for an end to the war.

US State Department spokesperson Matthew Miller said Washington continued to engage with Israel on amendments to a ceasefire proposal, adding work to finalize the text of an agreement was "incredibly difficult".

Medical sector collapsing

Israeli residents set fire twice to the perimeter of the headquarters of the UN agency for Palestinian refugees in East Jerusalem, causing extensive damage to the outdoor areas but no casualties, UNRWA chief Philippe Lazzarini wrote on X. There was no immediate comment from Israeli police.

"Once again, the lives of UN staff were at a serious risk," Lazzarini wrote, adding he had decided to close the compound until security is restored.

On Tuesday, Israeli tanks seized the Gaza side of the Rafah border crossing with Egypt, cutting off a vital aid route and forcing 80,000 people to flee the city this week, according to the United Nations.

Israel kept up tank and aerial strikes across Gaza and tanks advanced in the Zeitoun neighbourhood of Gaza City in the north, forcing hundreds of families to flee, residents said. The Israeli military said it was securing Zeitoun, starting with a series of intelligence-based aerial strikes on approximately 25 militant targets.

Deir Al-Balah in central Gaza was packed with people who had fled Rafah in recent days. Palestinian medics said two people, including a woman, were killed when a drone fired a missile at a group of people there.

The closure of the Rafah crossing with Egypt has prevented the evacuation of the wounded and sick and the entry of medical supplies, food trucks and fuel needed to operate hospitals, the Gaza health ministry said on Thursday.

The only kidney dialysis centre in the Rafah area had stopped operating due to the shelling.

"The entire medical sector has collapsed," said Ali Abu Khurma, a Jordanian surgeon volunteering at Al Aqsa hospital in Deir al-Balah.

United Nations aid chief Martin Griffiths said that for three consecutive days, "nothing and no one has been allowed in or out of Gaza."

"It means no aid. Our supplies are stuck. Our teams are stuck. Civilians in Gaza are being starved and killed, and we are prevented from helping them. This is Gaza today, even after 7 months of horrors," Griffiths posted on X.