* Israel says fired at "military targets" in Gaza
* Three Hamas members, one civilian killed
* Hamas says Gaza incendiary balloons to continue
* Israel threatens broader military action in Gaza
Israeli air and ground forces killed four Palestinians in the Gaza Strip on Friday, Palestinian health officials said, as the Israeli military said its troops had come under fire.
The military said aircraft and tanks hit eight Hamas positions in Gaza after its forces had been shot at and had explosive devices hurled at them along the border. More air strikes pounded Gaza as darkness fell in what the military described as a "wide-scale attack against Hamas".
Israeli media said Prime Minister Benjamin Netanyahu was holding discussions with cabinet colleagues and military chiefs about the escalation of hostilities during the long-running border protests on the Israel-Gaza frontier.
Hamas claimed three dead as members of the group. The fourth was a civilian, local residents and medics said. At least 120 Palestinians were wounded.
Earlier, Hamas defied Israeli calls to stop launching incendiary balloons from the Gaza Strip, as Israel's defence minister threatened to order a military offensive to prevent them. Fires caused by kites and helium-filled balloons have ravaged farmland in Israel in recent months.
The tactic has become popular during the months-long Gaza border protests known as 'The Great March of Return', in which more than 140 Palestinians have been killed by Israeli security forces.
Palestinians have held the protests to demand the right to return to homes and villages from which they fled or were driven during the conflict surrounding the creation of the modern state of Israel in 1948. But more recently some Gaza officials said the protests would end if Israel lifted an economic blockade of the Strip.
Israel says Hamas has been orchestrating the demonstrations to provide cover for militants' cross-border attacks. Hamas denies this.
Khalil al-Hayya, Hamas's deputy chief in Gaza, said on Friday the kites would continue to fly. "In the face of Zionist threats, we say the resistance will continue, the marches will continue and its tools will continue to vary and take different forms, including the kites," he said.
Visiting the Israeli town of Sderot on Friday, Defence Minister Avigdor Lieberman reiterated Israeli demands that Hamas stop the kite fliers.
"We are trying to be balanced and responsible but Hamas's leaders are forcing us into a situation in which we will have no choice but to embark on a broad and painful military operation," Lieberman said. "Responsibility will fall entirely on Hamas's shoulders, but I'm sorry to say that ordinary Gazans will have to pay the price."
Hayya also said on Friday that Hamas was holding two Israeli soldiers that Israel had declared killed in action during a 2014 war in Gaza.
He said they would be returned only as part of a deal similar to that in 2011 under which captured Israeli soldier Gilad Shalit was released in exchange for more than 1,000 Palestinians jailed in Israel.
"Your soldiers are still in our hands ... The occupation (Israel) will not see them until they pay the price, just like they did for Shalit," Hayya said.