GAZA CITY - A ceasefire announced by Hamas largely held Sunday after the most severe exchange of fire between Israel and Palestinian militants in the Gaza Strip since a 2014 war, easing fears of a wider conflict for now.

Hamas, the Islamist movement that runs the blockaded Gaza Strip, said late Saturday a ceasefire had been reached with the help of Egypt and others, though Israel declined to comment.

The United Nations' Middle East envoy Nickolay Mladenov was in Gaza and "working with all concerned parties to de-escalate the situation," a UN official said on condition of anonymity.

Despite a few lower-level exchanges of fire overnight, relative calm returned to the Gaza Strip.

In one incident on Sunday, an Israeli aircraft fired at what it said was militants launching balloons carrying firebombs over the Gaza border fence. It was not yet clear if there were casualties.

Saturday saw dozens of Israeli air strikes, killing two Palestinians, while some 200 rockets and mortars were fired from the enclave at Israel.

Four Israelis were wounded when a rocket hit a house in the city of Sderot near the Gaza Strip, authorities said.

The two Palestinians killed were aged 15 and 16, caught in an Israeli strike on a building in the west of Gaza City, the enclave's health ministry said.

Twenty-five people were wounded across Gaza, the ministry said. Hamas said it fired at Israel in defence in response to air strikes, which came after a soldier was wounded by a grenade along the Gaza border.

Fawzi Barhoum, Hamas spokesman, said "the protection and the defence of our people is a national duty and a strategic choice."

Israel blamed Hamas for the escalation, pointing to months of protests and clashes along the border that its military argues the Islamist movement is seeking to use as cover for attacks.

There have also been hundreds of fires at Israeli farms caused by kites and balloons carrying firebombs from Gaza, leading to political pressure on the government and military to take action against Hamas.

Israeli Prime Minister Benjamin Netanyahu said that Hamas had been hit with "the hardest blow" since a 2014 war and that "we will increase the strength of our attacks as necessary."

At the start of a cabinet meeting on Sunday, he denied what he said were reports that "Israel has agreed to a ceasefire that would allow the continuation of terrorism by incendiary kites and balloons".

"This is incorrect," he said. "We are not prepared to accept any attacks against us and we will respond appropriately." Thick plumes of smoke had risen over parts of the Gaza Strip on Saturday as Israel hit dozens of targets it said belonged to militants, including a high-rise building allegedly used by Hamas as a training facility with a tunnel underneath.

The army said the strikes targeted Hamas military facilities, including a battalion headquarters, training facilities and weapons storage areas.

In Israel, air raid sirens on Saturday sent people rushing to shelters in areas surrounding the Gaza Strip as rockets and mortars were fired from the Palestinian enclave at nearby communities.

Israel said its air defences intercepted around 30 of the some 200 rockets and mortars fired.

Tensions have been building between Hamas and Israel for months over mass protests and clashes along the border fence. The two sides have already fought three wars since 2008.

The protests have called for Palestinian refugees to return to their former homes now inside Israel.

Since the protests and clashes broke out along the border on March 30, at least 141 Palestinians have been killed by Israeli fire.

The majority of those killed were involved in protests and clashes but others were seeking to breach or damage the border fence.

No Israelis have been killed.

The arson balloons and kites from Gaza have caused 750 fires and burned 2,600 hectares, leading to hundreds of thousands of dollars in damage, according to Israel's fire service.

On July 9, Israel closed its only goods crossing with the Gaza Strip in response to the fires.

Hamas called the move a "crime against humanity," with Gaza already suffering from deep poverty and worsening humanitarian conditions.

Border protests peaked on May 14, when the United States moved its Israel embassy to the disputed city of Jerusalem, but have continued at a lower level since then.

On Friday, Israeli troops shot and killed two Palestinians, including a teenager, and wounded hundreds of others in border clashes.

An Israeli soldier was also moderately wounded when a grenade was thrown at him from the northern Gaza Strip, the military said.

Israel says its use of live fire is necessary to defend its borders and stop infiltrations. Palestinians and rights groups say unarmed protesters are being shot while posing no real threat.