The rocket hit the town of Netivot, ending a brief overnight lull to three days of fighting, which has left six Palestinians dead, including four civilians, and 40 wounded. Eight Israelis have also been wounded in the cross-border attacks.
"We have a full box of tools ... that we have not yet used," Israeli Vice Prime Minister Moshe Yaalon told Army Radio. "We will need to toughen our response until Hamas says 'enough' and ends the fire."
The movement Hamas, which refuses to recognise Israel's right to exist, governs in Gaza.
However many of the missiles fired out of the coastal enclave are launched by other groups, with Monday's strike claimed by the radical Salafi organisation, the Shoura Council of the Mujahedeen.
Israel went to war against Hamas in the winter of 2008-2009 but has shown little appetite for a new round that could strain fraught relations with the new Islamist-rooted government in neighbouring Egypt, which made peace with Israel in 1979.
But conservative Prime Minister Benjamin Netanyahu may be reluctant to seem weak ahead of a Jan. 22 general election that opinion polls currently predict he will win.
Yaalon admitted there was no "bang and we're done" solution and declined to say if Israel would return to a former policy of targeted killings of Gaza leaders.
"I am not calling for any one thing specifically," he said.
On Saturday, a Palestinian missile strike wounded four Israeli troops on a jeep patrol along the Gaza boundary, triggering army shelling in which the four Palestinian civilians died.
In turn dozens of mortars and rockets were launched at Israel and the military carried out a series of air strikes throughout the Gaza Strip. Israel's Iron Dome missile defence system knocked down a number of longer-range rockets.
Egypt has been trying to broker a ceasefire between the Palestinian factions and Israel, a Palestinian official with knowledge of the contacts told Reuters.
"Nothing has yet been formalised. Israel and Hamas kept their old positions. Calm will be met with calm and escalation with escalation," the official said.