The Israeli army has killed three Palestinians in the southern Gaza Strip and a Hamas official has said that Israel was negotiating a prisoner exchange to end the Gaza crisis.

The latest violence occurred in Rafah on Friday, near where Palestinian gunmen seized an Israeli soldier in a cross-border raid on June 25 .

In public Israel has rejected the Palestinian demands for a prisoner exchange but on Friday the Lebanese Arabic daily Al-Nahar reported that Egyptian was mediating a deal between the rival sides.

Al-Nahar said that the Israeli soldier might be released in return for freeing Palestinian detainees in Israeli jails.

"Israel has accepted the principle of a prisoner exchange," al-Nahar quoted a member of Hamas' politiburo in Damascus, Mohammed Nazal, as saying.

"The groups that kidnapped the Israeli soldier are asking that 1,000 Arab and Palestinian prisoners be released but differences remain as to this number and the names [of the inmates]," Nazal also said.

Deaths

Medics and witnesses said two Palestinian men were killed and another was wounded when a tank shell landed near a house in Rafah shortly after daybreak on Friday.

A Hamas fighter was also killed on Friday in a separate Israeli air strike, medics said.

An army spokeswoman said Israel had launched an air strike against two gunmen in the area.

Israeli ground forces swept into the Rafah area on Thursday to destroy what the army called "terrorist infrastructure."

Troops backed by armoured vehicles have since taken over a 3-5 km area, carried out house-to-house searches and destroyed greenhouses and chicken farms.

Eleven people have been killed in the incursion since Thursday. Twelve have been detained.

Other raids

Two air raids elsewhere in Gaza on Friday destroyed a building used by Hamas and targeted another used by Islamic Jihad.

An Israeli military spokeswoman said those air strikes had targeted weapons depots of both groups. Palestinian sources said they were private homes.

Medics said two passers-by were wounded in one of the Israeli attacks.

A three-day old baby also died on Friday after being dropped by her mother while fleeing advancing Israeli troops in her village near Rafah on Thursday.

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Some 162 Palestinians have been killed since the capture of Shalit. (Al-Jazeera)