Israeli tanks have pushed deep into Gaza City, prompting fierce exchanges of gunfire with fighters of the Palestinian militant group Hamas, CNN reported.
The UN's relief agency, Unrwa, says part of its HQ in Gaza caught fire after being hit by Israeli shells.
UN chief Ban Ki-moon expressed outrage. Israeli PM Ehud Olmert said troops returned fire after coming under attack from the UN's compound.
Israel's head negotiator is in Cairo to discuss an Egyptian ceasefire plan.
Hamas officials, who have been meeting separately with the Egyptian mediators in Cairo, said progress had been made, but did not elaborate.
Speaking to reporters on the Israel-Gaza border, Unrwa spokesman Christopher Gunness said three of the agency's employees were hurt in the attack on its compound in Gaza City.