The small column of military vehicles crossed the boundary fence into the northern Gaza Strip under darkness, said the witness, a resident of Beit Lahiya.
An Israeli military spokeswoman confirmed the incursion and said the aim was to seize areas from where Hamas was launching rocket attacks on southern Israel.
"The objective is to destroy the Hamas terror infrastructure in the area of operations," Major Avital Leibovitch said.
Israeli tanks and troops had been massed on the border for days awaiting a possible invasion as Israeli firepower pounded Gaza from land, sea and air.
Witnesses had earlier reported Hamas fighters taking up positions in Gaza to repel any Israeli incursion.
Israeli officials had repeatedly warned they were prepared to step up military action if Hamas rocket attacks on southern Israel did not stop but Hamas kept up the action on Saturday.
An Israeli air strike earlier on Saturday evening killed 11 Palestinian worshippers, including children, and wounded dozens as in a mosque in Beit Lahiya, Hamas officials and medics said.
Rescuers pulled people from the debris and the bodies of victims lay in pools of blood, witnesses said.
Israel has targeted mosques previously saying that Hamas had used them as command posts and fire bases.
The mosque raid brought the Palestinian death toll to at least 446, with about 2,050 wounded, in the worst sustained bloodshed in decades of the conflict between Israel and the Palestinians.
Four Israelis have also been killed in the cross-border rocket attacks by Hamas and other militant groups.
Israeli air strikes targeted Gaza from early morning on Saturday and naval vessels also shelled the area from the Mediterranean, witnesses said.
One strike killed Abu Zakaria al-Jamal, a senior commander of Hamas's armed wing, Hamas said. He was the second Hamas leader killed in three days.
Israel launched the campaign, called Operation Cast Lead, on Dec. 27 saying it wanted to stop the rocket attacks.
But about 30 Hamas rockets smashed into Israel on Saturday, the military said. Two people were hurt by shrapnel when a rocket hit a building in the port city of Ashdod.
Hamas said the Israeli operation would not force it to bow.
"Whoever thought a change in the political area could come through the bombs of planes and the tanks and without dialogue is an illusionist," it said in a statement after a cabinet meeting in Gaza in an undisclosed location.
The attacks have sparked a wave of protests around the world, where thousands of demonstrators marched in solidarity with the Palestinians in European cities on Saturday.
In Paris, more than 20,000 demonstrators, many wearing Arab keffiyeh headscarves, chanted slogans like "Israel murderer!".
In London, 10,000 protesters led by singer Annie Lennox marched with Palestinian flags and placards with slogans such as "End the siege on Gaza" and "Stop the massacre".
The plight of the 1.5 million Palestinians crammed into Gaza was growing more desperate. People sheltered in their homes and humanitarian agencies warned that food, water and medical supplies were running short.
"Nobody feels safe," an International Committee of the Red Cross worker said in a report on the body's website.
"The problem is that we have nowhere to run for shelter."
The power plant has shut down and the sanitation system cannot treat the sewage. In the winter cold, fuel for heating and cooking was no longer available, aid agencies said.
"We do not sleep at all at night. We stayed awake the whole night because of the planes," said Umm Kamel, a mother of 11 baking bread on a wood fire in her home in Gaza.
Israel has denied a humanitarian crisis is unfolding and says it has allowed food and medicine convoys into Gaza daily.
U.S. President George W. Bush said Hamas - which the United States, Israel's main backer, deems a terrorist organisation - must take the first step towards a ceasefire.
"Another one-way ceasefire that leads to rocket attacks on Israel is not acceptable," Bush said in a weekly radio address.
Israel occupied Gaza in the 1967 Middle East War and after Palestinian uprisings formally ended its military rule in 2005, although it still controls the borders.
International peace efforts aimed at creating an independent Palestinian state foundered after Hamas won elections in 2006 and drove Fatah forces loyal to Palestinian President Mahmoud Abbas from Gaza a year later.
Hamas called off a six-month truce with Israel last month and stepped up the rocket attacks, complaining at Israeli raids into Gaza and a continuing blockade of the enclave.
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