At least 44 Palestinians have been killed while the Israeli military says two soldiers are dead and an infantry officer is feared captured in Gaza.
Israel and Hamas are accusing each other of breaking the ceasefire, which had been announced by the US and UN and took effect at 8am local time today. The fighting broke out less than two hours later.
The breakdown of the truce and the apparent capture of the Israeli soldier set the stage for a major escalation of the 25-day-old conflict, which has already devastated large swathes of the coastal area and killed at least 1,500 Palestinians, mainly civilians, according to Palestinian officials. Israel has lost 63 soldiers and three civilians.
An hour after the ceasefire started, gunmen emerged from one or more Gaza tunnels and opened fire at Israeli soldier, with at least one of the militants detonating an explosives vest, said an Israeli army spokesman.
Hadar Goldin, a 23-year-old 2nd Lt from the central Israeli town of Kfar Saba, was apparently captured during the ensuing mayhem and taken back into Gaza through a tunnel, while another two soldiers were killed.
The Israeli army suspects Goldin has been kidnapped.
The White House condemned the incident, describing it as an "absolutely outrageous" action by Hamas. Deputy National Security Adviser Josh Earnest said the soldier must be released immediately.
Israeli prime minister Benjamin Netanyahu, meanwhile, told US Secretary of State John Kerry in a telephone conversation that Palestinian militants had "unilaterally and grossly" violated the ceasefire and attacked Israeli soldiers after 9am.
"Israel will take all necessary steps against those who call for our destruction and perpetrate terrorism against our citizens," Netanyahu told Kerry, according to a statement from the prime minister's office.
Mark Regev, Netanyahu's spokesman, said Hamas had "yet again thrown away a chance for a humanitarian relief for the people of Gaza, by deliberately violating this ceasefire".
Moussa Abu Marzouk, Hamas' deputy leader, told Al-Arabiya news channel from Cairo that the movement's military wing carried no military operations after 8am, when the truce came into force.
If confirmed, Goldin's capture could dramatically change the trajectory of the conflict. Any ceasefire efforts would likely be put on hold and Israel might instead expand its ground operation. Israel has in the past gone to great lengths to return captured soldiers. In 2011, it traded hundreds of Palestinian prisoners for an Israeli soldier who had been captured by Hamas-allied militants in 2006.
A Hamas spokesman would neither confirm or deny the capture, saying it was being used - along with news that two Israeli soldiers were killed in the Rafah area - as a cover for a "massacre."
The Israeli military said the heavy shelling in Rafah that followed was part of operational and intelligence activity designed to locate Goldin.
A friend of Goldin's said he is engaged to get married and that he studied at a religious Jewish seminary in the West Bank settlement of Eli. Goldin has a twin brother who is also in the military on the Gaza frontlines, he said.
The soldier's father, Simha Goldin, is a Tel Aviv University professor specialising in Ashkenazi Jewry, the friend said.
"We want to support the military in the fighting against Hamas in Gaza. We are sure the military will not stop before it turns over every stone in Gaza and returns Hadar home safe and sound," the father said in a brief statement to media outside his home.
The shelling in Rafah sent families fleeing from apartment blocks as pillars of smoke caused by the shelling rose from them.
Ambulances ferried the injured to Rafah's al-Najar hospital, where bloodied bodies on stretchers were carried inside and family members frantically searched for loved ones. Many of the injured were children, their clothes stained with blood. In one hospital room, four children were treated on a single bed. Others were being examined on the floor.
The shelling killed at least 44 Palestinians and wounded 250 in Rafah, Gaza health official Ashraf al-Kidra said. He said rescue workers were searching for people buried under the rubble. He did not say whether those killed were civilians or militants.
On July 8, Israel launched an aerial campaign against Gaza aimed at halting Palestinian rocket fire and later sent in ground troops to target launch sites and tunnels used by Hamas to carry out attacks inside Israel.
Four brief humanitarian ceasefires had been announced since the conflict began, but each broke within a few hours. The military said Gaza militants had fired at least 23 rockets and mortars at Israel since the start of Friday's ceasefire, one of which was intercepted.
The latest ceasefire, announced by US Secretary of State John Kerry and UN chief Ban Ki-moon, was intended to be the first step toward a lasting truce, with Egypt inviting Israeli and Palestinian delegations to Cairo for talks.
Despite the collapse of the latest truce, an Egyptian government official said Cairo had not cancelled its invitation for Palestinians and Israelis to hold talks there.