For the first time in decades air raid sirens sounded in Jerusalem as a rocket fired from Gaza landed in an unpopulated area near the city.
There are no reported casualties from the attack, but the targeting of Jerusalem is the latest escalation in the exchange of Hamas missiles and Israeli airstrikes.
Israeli ministers have now approved calling up more reservists and defence force spokeswoman Lieutenant Colonel Avital Leibovich says sending in ground troops is an option.
"A ground operation has not been decided upon yet, but it is an option. It's one of many options we're considering. Since the operation is still ongoing and unfortunately the rocket fire is still coming in," she said.
Tanks and self-propelled guns were seen near the border area on Friday, and the military said it had already called 16,000 reservists to active duty.
The deadly escalation of tension in the Middle East, which has seen more than 27 Palestinians and three Israelis killed, follows the assassination of Hamas military commander Ahmed al-Jabari.
As the region veers towards all-out war, there are reports that at least eight children are among the dead in Gaza.
The rocket attack on Jerusalem is symbolically important because it shifts perceptions of the capabilities of Hamas missiles. They now have the range to reach not only the commercial capital, Tel Aviv, but also apparently the centre of the Israeli government.
It is the first Palestinian rocket since 1970 to reach the vicinity of the holy city, which Israel claims as its capital, and is likely to spur an escalation in the three-day old air war against militants in Gaza.
Rockets nearly hit Tel Aviv on Thursday for the first time since Saddam Hussein's Iraq fired them during the 1991 Gulf War.
An air raid siren rang out on Friday when the commercial centre was targeted again.
Motorists crouched next to cars, many with their hands protecting their heads, while pedestrians scurried for cover in building stairwells.
Prime minister Benjamin Netanyahu convened senior cabinet ministers in Tel Aviv after the rockets struck to decide on widening the Gaza campaign.
"The Israel Defence Forces will continue to hit Hamas hard and are prepared to broaden the action inside Gaza," Mr Netanyahu said.
Asked about Israel massing forces for a possible Gaza invasion, Hamas spokesman Sami Abu Zuhri said: "The Israelis should be aware of the grave results of such a raid and they should bring their body bags."
ABC correspondent Norman Hermant is in Jerusalem and says the increase in the number of Israeli reservists being called-up could point to a possible ground operation:
Meanwhile, US president Barack Obama has reiterated US support for Israel's right to defend itself during a call with Mr Netanyahu on Friday.
"The president reiterated US support for Israel's right to defend itself, and expressed regret over the loss of Israeli and Palestinian civilian lives," the White House said in a summary of the conversation.
Mr Netanyahu, who initiated the call, expressed his deep appreciation for US investment in the Iron Dome rocket and mortar defence system, "which has effectively defeated hundreds of incoming rockets from Gaza and saved countless Israeli lives," according to the readout.
Mr Obama also spoke with Egyptian president Mohamed Morsi, commending his country's efforts to de-escalate the situation and expressing his hope that these efforts would be successful, the White House said.
"The president expressed regret for the loss of Israeli and Palestinian civilian lives, and underscored the importance of resolving the situation as quickly as possible to restore stability and prevent further loss of life," said a summary of that call, which was initiated by Mr Obama.
Egyptian prime minister Hisham Qandil visited Gaza yesterday and called on Israel to stop its aerial bombardment of Gaza.
"This tragedy needs immediate intervention - serious work from all parties. And this is what Egypt has started," he said.
He said Egypt would do all it could to stop the Israeli "aggression" and achieve a "sustainable truce."
Mr Qandil's Islamist government is allied with Hamas but also party to a 1979 peace treaty with Israel.
"Egypt will spare no effort ... to stop the aggression and to achieve a truce," he said.
But a three-hour truce that Israel declared for the duration of Mr Qandil's visit never took hold. Israel said 66 rockets launched from the Gaza Strip hit its territory on Friday and a further 99 were intercepted by the Iron Dome anti-missile system.
Israel denied Palestinian assertions that its aircraft struck while Mr Qandil was in the enclave.
UN officials have announced that secretary-general Ban Ki-moon will visit the region within days to push for a truce between Israel and Hamas.
UN spokesman Martin Nesirky said Mr Ban will go to the region "shortly" to "push for an end to violence" and Palestinian president Mahmud Abbas said the UN secretary general would visit the Palestinian territories in "two or three days."
Mr Ban will be in Jerusalem on Tuesday or Wednesday, according to UN Diplomats and Israeli media.
"Ban went to the region during the last Israeli offensive against Gaza in 2009 and worked hard to end that conflict. He is looking to produce a truce and ceasefire this time as well," said one senior UN diplomat.