Heavy urban combat raged in and around Gaza's biggest cities on Thursday as the bloodiest-ever war between Israel and Palestinian group Hamas entered its third month since the militants' attack on October 7.

The death toll in Gaza has soared to 17,177 according to the Hamas-run health ministry, and vast areas of the besieged territory have been reduced to a rubble-strewn wasteland of bombed-out or bullet-scarred buildings.

Israeli forces have encircled major urban centres as they seek to destroy Hamas over its unprecedented attack in October when militants broke through Gaza's militarised border to kill around 1,200 people and seize hostages, 138 of whom remain captive, according to Israeli figures.

Backed by air power, tanks and armoured bulldozers, Israeli troops were fighting on Thursday in Khan Younis, the biggest city in southern Gaza, as well as in Gaza City and the nearby Jabalia district of the north.

Prime Minister Benjamin Netanyahu said troops had closed in on the Khan Younis home of Hamas's Gaza chief Yahya Sinwar, 61, vowing "it is only a matter of time until we find him."

His government responded angrily to United Nations chief Antonio Guterres after he invoked the rarely-used Article 99 of the UN charter, calling on the Security Council to push for a ceasefire.

Foreign Minister Eli Cohen said this would help Hamas and that Guterres was "a danger to world peace."

"Two months on the road, moving from one place to another. These are the hardest two months we have experienced in our lives," said Abdallah Abu Daqqa, displaced from Khan Younis to Rafah.

Gazans have been pushed south, turning Rafah near the Egyptian border into a vast camp for many of the 1.9 million Palestinians displaced by the conflict – 80 percent of Gaza's population.

But air strikes have followed them.

Eight more hit Rafah overnight. Witnesses said they saw around 20 corpses in white body bags, including a child, at its Nasser hospital, while men gathered nearby to pray.

Mass civilian casualties have sparked global concern, heightened by dire shortages caused by an Israeli siege that has seen only limited access for food, water, fuel and medicines.

Fighting in Khan Younis means aid distribution has virtually stopped in the city, leaving Rafah the only area where limited supplies are reaching Gazans, according to UN humanitarian agency OCHA.

Israel has approved a "minimal" increase in fuel supplies to prevent a "humanitarian collapse and the outbreak of epidemics," and called on the international community to "increase its capabilities" to distribute aid.

OCHA chief Martin Griffiths said there were "promising signs" Israel may open the southern Kerem Shalom crossing to aid deliveries.

But Hamas has declared a "state of famine" in northern Gaza, saying no aid had arrived there since December 1.

And Israeli rights group B'Tselem said on Thursday that the "miniscule amount of aid" allowed into the territory was "tantamount to deliberately starving the population."

"We are dying here, without even the need for rockets and bomb strikes. We are dead already, dead from hunger, dead from displacement," said Abdelkader al-Haddad, a Gaza City resident now in Rafah.

The deaths of six more Israeli soldiers were announced, raising the toll inside Gaza to 89, said the military.

In a morning briefing, it said troops had "killed Hamas terrorists and struck dozens of terror targets" in Khan Younis, and raided a military compound of Hamas's Central Jabalia Battalion.

Naval forces hit Hamas military compounds and infrastructure "using precise ammunition and firing shells."

Hamas released footage of its fighters shooting AK-47 assault rifles and grenade launchers from abandoned buildings in what it said was Gaza City, and said it was battling Israeli troops "on all axes of the incursion into the Gaza Strip."

The militant group said it had destroyed two dozen military vehicles in Khan Younis, and in Beit Lahia in the territory's north.

Rocket fire from inside Gaza has continued to target Israel, where the projectiles have been intercepted by air defences.

An anti-tank missile fired from Lebanon meanwhile killed a civilian in Israel, said the army and medics.

Near-daily exchanges of fire across the UN-patrolled Israel-Lebanon border have continued, mainly involving Lebanon's Hezbollah which, like Hamas, is backed by Iran.

Netanyahu warned Hezbollah that if it "chooses to start a global war, then it will turn Beirut and South Lebanon... into Gaza and Khan Younis with its own hands."

Israelis remained deeply traumatised by the horror of the Hamas attack and fearful for the fate of hostages as they headed into the Jewish festival of lights, Hanukkah, from Thursday evening.

One of the worst-hit sites on October 7, the Supernova music festival, was recreated in a Tel Aviv exhibition hall to remember those killed and abducted by Hamas, complete with victims' tents and recovered belongings.

In Jerusalem, candlesticks were arranged as usual for the Jewish festival, and customers lined up for Hanukkah doughnuts. (AFP)