By Aluf Benn, Amos Harel, Mijal Grinberg and Yoav Stern, Haaretz Correspondents and Haaretz Service
There were no immediate reports of injuries.
The decision by Olmert and Peretz essentially adopts the defense minister's proposal to alter the policy of restraint in the wake of ongoing fire on southern Israel.
"A directive has been given to the defense establishment to take pinpoint action against the rocket-launching squads," Olmert's office said in a statement, a day after two teenage boys were wounded, one of them critically, by a Qassam rocket that struck the western Negev town of Sderot.
The two met with senior military and intelligence officials to discuss the escalation of rocket fire across the Gaza border on Wednesday morning.
According to the Prime Minister's Office statement, the IDF has also been instructed to uphold the cease-fire in general. "In parallel, Israel will continue to maintain the ceasefire and work with the Palestinian Authority so that immediate steps are taken to halt the Qassam firings."
Government spokeswoman Miri Eisin said Israel would do its best to preserve the truce, even while attacking rocket-launching cells. "Israel has shown restraint," she said. "Israel will continue to be restrained, and we will only take pinpointed action against the launching cells."
Responding to decision, Saeb Erekat, a senior aide to PA Chairman Mahmoud Abbas, said maintaining the cease-fire was in the Palestinian national interest, calling on Palestinian militants to stop firing Qassam rockets.
"I also urge Israel to refrain from attacking the Palestinians and to be committed to the ceasefire," he said. "Our past experience taught us that violence begets violence and bullets beget bullets."
Hamas government spokeswoman Ghazi Hamad denounced the decision to
"continue their aggression against our people," but added: "We still believe that this agreement is alive, and both sides should respect this agreement because it is (in) the interest (of) our people."
Islamic Jihad, however, threatened to increase the rocket fire in response to the decision, Israel Radio reported.
Peretz and senior IDF officials had called on Olmert to suspend the policy of restraint and let the army fire at Qassam rocket-launcher cells that can be identified during or shortly after operation.
"We cannot continue to restrain ourselves," Peretz told Olmert on Tuesday night. "We cannot let Jihad continue to do what it wants; we must take immediate action against the Qassams."
Peretz has been vocal in recent days about his dissatisfaction with the policy of restraint. He agrees with IDF officials who support identifying missile-launcher cells and destroying them during or immediately after a launch. Peretz believes the risk to Palestinian civilians is low if the IDF operations are confined to unpopulated areas used by terror cells, and that this would not end the cease-fire.
Military sources admitted that the cell responsible for Tuesday's missiles could not be located due to inclement weather. Military officials had warned since close to the beginning of the cease-fire that failure to respond to the attacks would cost Israeli lives.
Opposition leader Benjamin Netanyahu (Likud) told Israel Radio on Wednesday that the Israel Defense Forces must immediately reoccupy key areas of the Gaza Strip, including the Philadelphi Route along the Gaza-Egypt border, in order to prevent the ongoing Qassam rocket fire and arms smuggling.
"[The government] must take control of the areas from which Qassams are fired - this is not the entire Gaza Strip, it is not even a small part of the Gaza," said the former prime minister. "But it is a defined area. We know the Qassam [range] radius, and where they are firing them."
"[The government] must stop [arms] smuggling, by taking control of key areas," he said. When asked if this includes the Philadelphi Route, Netanyahu responded "definitely," although he said the military presence there would not necessarily be permanent.
Netanyahu also called on the government to work to bring about the fall of the Hamas-led Palestinian Authority government, and "halt all negotiations and all gestures, until a complete end to the terrorism."
"The way to overthrow the Hamas government is to strangle it," he said. "They were under a strangle-hold that almost brought about their collapse, you saw them in a civil war. And this strangle-hold was an economic one - they couldn't pay salaries."
"What has the government done?" he said, referring to the decision to transfer $100 million to PA Chairman Mahmoud Abbas. "The government has opened the flow of money - not just from Israel, [although] $100 million is a lot of money - but also the flow of hundreds of millions of dollars from the Europeans, saving the Hamas government."
"That is a fundamental error, and an additional error is to declare a unilateral cease-fire that essentially allows them to fire at us and demonstrates weakness," he said.
National Infrastructures Minister Benjamin Eliezer echoed the defense minister's sentiment, telling Israel Radio: "We cannot restrain ourselves anymore. We've restrained ourselves, and it's good that we did, because the entire world saw that we did above and beyond [what was called for], but we cannot turn an entire town, excuse me, into a graveyard."
The former defense minister stressed, however, that he would only recommend the IDF resume targeting Qassam rocket cells, saying the military should not reoccupy parts of Gaza.
Qassam wounds two 14-year-old boys, one critically
Two boys, both 14, were injured on Tuesday night when a Qassam rocket landed in the street near where they were walking. Both were treated by Magen David Adom paramedics and taken to Barzilai Medical Center in Ashkelon.
A total of eight Qassams were fired at Israel Tuesday, the most in a single day since the cease-fire was declared about a month ago.
Late Tuesday night, hospital officials said that Adir Ghasad was in surgery and in critical condition, while Matan Cohen was in moderate to serious condition and in danger of losing his leg.
The hospital's director Dr. Shimon Sherf told Israel Radio on Wednesday morning that Ghasad's condition had stabilized.
"He arrived in very serious condition, in critical condition, [and] was barely able to maintain blood pressure," said Sherf. "He was full of shrapnel from head to toe, and after a lengthy surgery ... we were able to stabilize him. He is currently in recovery and maintaining blood pressure, and I hope he will make it through this trauma."
Sherf however said it is too early to say that the injuries are no longer life-threatening.
"The second boy [Cohen] is stable, he is on a respirator, and he is maintaining blood pressure," said Sherf. "He has shrapnel in soft tissue in various parts of his body. Other than the amputation of four toes ... his condition is relatively stable." Cohen's condition is listed as moderate to serious.
Islamic Jihad claimed responsibility for firing the missiles from the Gaza Strip at the western Negev town.
The incident was the most serious since a cease-fire was put into place, although more than 60 rockets have been fired during this period.
The IDF did not respond to the Qassams, observing the policy of restraint set by Olmert.
Another Sderot resident was slightly injured earlier this week by a Qassam.
One of the Qassams fired at Israel Tuesday landed in the industrial area in south Ashkelon, close to a strategic infrastructure installation. Another rocket landed south of the city. Four Qassams landed in open areas in the vicinity of Sderot, while another landed inside the city. Eight people were treated for shock as a result of that missile, which also damaged buildings and cars.
A mortar landed near an IDF base near the Gaza border, across from the center of the Strip.
Palestinian sources said that a Palestinian farmer in the northern Gaza Strip was shot by IDF soldiers. Ismai'il Ghaban, 27, was on land owned by his family, north of Beit Lahia, when he was reportedly shot in the neck and the knee. IDF sources say he was shot while causing damage to the border fence. Palestinians have recently dismantled large parts of the border fence in the area to sell the metal for scrap. IDF soldiers are permitted to shoot anyone damaging the fence.
A resident of Sderot who lives near where the two teenagers were hit Tuesday night described what happened when the missile fell in the street outside. "I was at home, my daughter was on the second floor and suddenly started screaming," Shimon Peretz related.
"I went downstairs and saw the boys. I got my neighbor, he's a medic, and performed first aid on them and then I called for an ambulance. I can't describe the moment when the children were screaming and panicking. Just this morning two Qassams fell here with no warning."
A friend of the two injured boys adds: "I heard the 'red alert,' I was at home, and then I heard a loud noise and suddenly saw my friends lying on the ground, one was lying there with no foot." He added that the home of one of the boys, Matan Cohen, had been hit previously by a Qassam.
Angry residents gathered at the site. Some people were in shock, others expressed anger at the government's impotence and at its failure to protect Sderot's inhabitants.
Two teenage girls who were in shock were evacuated by ambulance after refusing to return to their homes. The families of the two boys,¬ the Cohens and the Ghasads, ¬ went to Barzilai to be with the injured, as did many friends of the families.
The residents expressed anger at Olmert's failure to visit Sderot and see the true situation of the city. One mother shouted that she cannot go to work because she has to stay at home with her children due to their great anxiety.