Israel has approved the Egyptian-brokered Gaza ceasefire truce on Tuesday but the armed wing of Hamas announced it had rejected the proposal, Reuters news agency reported.
Prime Minister Benjamin Netanyahu's security cabinet had convened to vote on the deal at Israeli military headquarters in Tel Aviv, Israeli officials said.
The decision was made minutes before it were to come into effect at 0600 GMT.
The Palestinian Islamist group Hamas rejectedthe Egyptian ceasefire proposal made on Monday, according to its official website, Al Arabiya reported.
The al-Qassam Brigades said it had not officially received the exact text of the cease-fire treaty but said that media reports exposed that it was "an initiative of kneeling and submission".
"Our battle with the enemy continues and will increase in ferocity and intensity," it added.
Egypt's proposal intended to close a week of trans-frontier violence which has resulted in the death of at least 180 Palestinians.
Israel's security cabinet said it would meet early Tuesday to discuss the proposal, the most serious attempt yet by international mediators to end the conflict that erupted last week, but a Hamas official said there was no deal.
According to a statement from Egypt's Foreign Ministry, the three-step plan would commence with a temporary cease-fire to go into effect within 12 hours of "unconditional acceptance" by the two sides.
That would be followed by the opening of Gaza's border crossings and talks in Cairo between the sides within two days, according to the statement.
A foreign ministry spokesman told state television that Egypt would seek Arab backing for the initiative at an extraordinary meeting of the Arab League on Monday night.
Hamas, however, said it would not commit to a cease-fire without a full agreement.
"A ceasefire without reaching an agreement is rejected. In times of war, you don't cease fire and then negotiate," Hamas spokesman Fawzi Barhum told AFP after Egypt proposed the truce which was set at 0600 GMT.
On Monday, Palestinian militants resumed rocket attacks on Tel Aviv after a 24-hour lull in strikes on the Israeli commercial capital, and Israel kept up its air and naval bombardments of the Gaza Strip.
The military said it had shot down a drone from Gaza, the first reported deployment of an unmanned aircraft by Palestinian militants and a possible step up in the sophistication of their arsenal, although it was not clear whether it was armed.
Their rocket attacks have been regularly intercepted but more than half a dozen Israelis have been wounded since the start of the week-old offensive. Gaza health officials say Israeli air strikes have killed 170 Palestinians, most of them civilians.
Talking after an extraordinary meeting of the Arab League in Cairo, the organization's chief Nabil AlAraby slammed Israel, accusing the Jewish state of committing "war crimes" and "crimes against humanity."
"Israel enjoys political immunity, it commits crimes without being charged for it," he said in Cairo.
Local media said U.S. Secretary John Kerry was due in Cairo on Tuesday for talks on the Gaza situation. There was no immediate U.S. confirmation of the report.
The European Union said it was in touch with "all parties in the region" to press for an immediate halt to the hostilities, the worst flare-up of Israeli-Palestinian violence for almost two years.
The violence was prompted by the murder of three Israeli teenagers and revenge killing of a Palestinian youth. Israeli officials said on Monday three people arrested over the Palestinian's death had confessed to burning him alive.