Prime Minister Ehud Olmert told ministers Sunday that Israel would act independently of Hamas activity in the Gaza Strip, regardless of whether the militant group continued to fire Qassam rockets at southern Israel or called for a cease-fire.

"I will not commit to coordinating our behavior with Hamas actions, either it [the group] opens fire or halts its fire," Olmert told the weekly cabinet meeting in Jerusalem, shortly after a Qassam rocket attack killed an Israeli man in the western Negev town of Sderot.

"Even if there were an internal cease-fire in Gaza, and if such an agreement held, it would apply to the [Palestinian] factions only," Olmert said.

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"We need to prepare for a long confrontation that does not depend on agreements between themselves, and act in accordance with the circumstances and knowledge that we have, which is of a long-term confrontation."

The prime minister also warned that Israel would continue targeting Palestinian militants in the Gaza Strip.

"No one who is involved in terrorism is immune," said Olmert. "Israel will not be subject to a timetable regarding its operations in Gaza."

Hamas responded to the prime minister's announcement by officially rejecting a truce proposal presented by Palestinian Authority Chairman Mahmoud Abbas. "We will not surrender, we will not raise the white flag," Ayman Taha, a spokesman for the group said in Gaza.

The prime minister added that he has asked the Knesset Finance Committee to declare all towns within eight kilometers of the Gaza Strip as frontline communities. The decision would allow business owners to seek compensation for indirect damages they suffer as a result of rocket attacks, and not just for direct damages.

According to Olmert, the decision would affect Sderot and 51 other towns. "The assistance will be provided between May 16 and August 31, providing a comprehensive answer to the area's economic problems," he said.

The prime minister stressed that he does not want "to create the expectation that the Qassam fire can be completely halted."

"We will do all we can in order to protect the residents and assist them," he continued. "I want to thank Sderot residents for their determination, for the fact that nothing can cause them to abandon their town."

In response to Olmert's comments Hamas official Sami Abu Zuhri said later Sunday his "threats and the continued Zionist escalation makes any talk about calm pointless."

Abu Ubaida, spokesman for Hamas' armed wing, also rejected what a Palestinian official described on Friday as a proposal by Palestinian Authority Chairman Mahmoud Abbas to cease rocket attacks if Israel halted strikes in Gaza.

"Our operations are continuing and calm is conditional on stopping the Zionist aggression in Gaza and in the West Bank," he said, reiterating Hamas's demand for a wider truce.

Abbas' plan calls for Gaza militants to halt rocket fire for a month in order to allow for negotiations on a more comprehensive truce that would include the West Bank.

Shin Bet chief: Hamas is in distress, but prepared for IDF ground offensive

Head of the Shin Bet security service Yuval Diskin briefed the cabinet ministers on the security situation in the Gaza Strip on Sunday during the weekly cabinet meeting and expressed his feeling that Hamas is currently in distress, but is prepared for an Israel Defense Forces ground offensive.

He said the Shin Bet assessment was that discussions within the Hamas are directed more and more at achieving a cease-fire with Israel. He added that it is the Shin Bet's belief that Hamas political leader Khaled Meshal is growing concerned over the attitudes among the Palestinian people, and over claims in the streets that the Qassam rocket fire undermines the Palestinian people's national objectives.

Diskin also said, "time is working against the Hamas, we must continue to make Hamas pay every day and we mustn't accept any proposal for truce in the Gaza Strip."

Diskin told the cabinet that most of the casualties suffered recently by Hamas belong to the executive branch, not the military wing. "The hits they are taking are shaking their confidence," he said. He added that Hamas has been facing difficulties in transporting its rockets from one place to another within the Strip, which explains the recent decline in rocket fire on Israel.

"The Hamas range of fire policy currently includes Sderot and the communities around the Gaza border, but not Ashkelon at this stage," Diskin said. "Hamas wants to create levels of response, so they are waiting for an escalation in the offensive against its members before it responds with a hit on Ashkelon."

Diskin also told the cabinet that Hamas is preparing defensively out of belief that the IDF will carry out a wide ground offensive in the Gaza Strip. "They are preparing tunnel bombs, explosives, snipers and suicide missions, and they want to see us advance into the residential areas," he said.

Diskin revealed that Hamas has begun launching Qassam rockets using methods similar to those of the Hezbollah, in close proximity to residences, and in some cases, from the roofs of people's homes.

Diskin said he believed that a renewed confrontation between Hamas and Fatah is inevitable, and that it will likely erupt in a matter of weeks if not days. He added that renewed clashes would probably be more violent than before. However, he added, the IDF and Shin Bet are making great efforts to avoid hurting the civilian population of Gaza. Only nine out of 59 people killed in the Strip in the past two weeks have been civilians, he said.

Peretz: Israel has ended the policy of restraint
Defense Minister Amir Peretz said during the cabinet meeting that "Israel has ended its restraint."

"We are at a stage where if there is an additional escalation, we have another list of targets," he said. "We are not equating between the number of missiles that Hamas fires and our attacks."

"We have a clear plan that will also include a ground operation within the security parameter," he said, referring to areas in the Gaza Strip that are close to the security fence.

According to the defense minister, the IDF will operate against Qassam-firing cells, Hamas facilities, the Qassam production process, and the money transfer infrastructure.

Foreign Minister Tzipi Livni said that any cease-fire agreement with the Palestinians must include an end to arms smuggling across the Gaza-Egypt border.

"A situation of calm in which Hamas' strengthening does not stop is a misleading situation," she said. "Israel must retain the option of acting against Hamas in Gaza as well as in Judea and Samaria even during the calm, and at the same time demand a change in the situation along the Philadephi Route."

"In any given agreement we must provide an answer to the issue of [Hamas'] strengthening," she continued.

The political leadership authorized the IDF on Friday to expand its operations in the Gaza Strip.