It was the first time that the IDF had targeted a Palestinian rocket-launching cell since the Gaza cease-fire was announced in November, and military sources said the operation was approved on the most senior levels, including Prime Minister Ehud Olmert and Defense Minister Amir Peretz.

The cease-fire has been continuously violated by the Palestinians since it went into effect.

However, Israel has maintained a policy of restraint and while it routinely shoots at Palestinians who approach the Gaza security fence, it has refrained from attacking deeper inside Gaza.

"We have decided on a policy of restrain but it needs to be clear that we will not compromise on our obligation to protect the State of Israel," Peretz said Wednesday night following a meeting with Israeli defense industries.

Southern Command sources said IDF ground forces were behind the strike that was made possible due to the quick identification of the Kassam squad by an IDF reconnaissance unit.

Sources in the Prime Minister's Office confirmed that the decision to fire into Gaza on Wednesday was based on operational considerations only, and had nothing to do with the Arab League summit in Riyadh or any other external event.

"There was a security cabinet decision a few months ago that we would respond directly to the firing of Kassam rockets," the sources said. "Here the conditions presented themselves in such a way that we knew for certainty that this cell was going to launch Kassams, and that we could hit them without accidentally hitting bystanders."

Olmert was informed in advance of the decision to fire on the cell.

"This had nothing to do with the summit in Riyadh, but about our right to defend ourselves," the sources said. "We will continue to strike out at terrorists who try to stop the ongoing dialogue between Palestinian moderates and Israel."

Earlier in the day, Ashkenazi said there was a "phenomenon of armament, especially with the Hamas" which was presenting a growing security challenge for Israel.

"The strengthening process of Hamas requires one solution or another on our part," Ashkenazi said during his first meeting with the Knesset's Foreign Affairs and Defense Committee. "There are large amounts of arms [smuggled in] and they have stepped up their operational planning. The Southern Command is preparing and training for the possibility that it will be put into action."

The Palestinians should be able to live in "a reasonable manner," stressed Ashkenazi, and the army should not "burden the population" when it wasn't necessary. He added, however, that it was important for the army to isolate the Gaza Strip and West Bank from each other to ensure that "the events in Gaza do not spill over to the West Bank."

Ashkenazi told the committee that his objective as IDF chief was to ensure that the army's fitness would be such that it would be "clear in every war who won and who lost."

"The purpose of the army is to ensure the state's supremacy and to win in the face of every challenge," said Ashkenazi. "We can't allow what happened in the Second Lebanon War to happen again."

Ashkenazi said that in light of the growing regional instability, the IDF would focus its efforts on preparing for possible future wars.

Ashkenazi also called Iran's intention to develop nuclear weapons an "existential threat" to Israel. Iran also provides the backbone for terrorism in the region, said Ashkenazi, through its support of Lebanon, Syria and Iraq.

"To increase our army's readiness, we need to train more. We'll need to increase reserve call-ups," said Ashkenazi, who added that he was also opposed to a new bill limiting yearly duty for reservists.

Earlier Wednesday, IDF troops shot and killed an Aksa Martyrs Brigades operative during an exchange of fire before dawn Wednesday in Jenin. The IDF said troops shot towards a group of armed men during an arrest operation in the West Bank town and that the soldiers identified hitting one of the gunmen.