Helicopters fired dozens of rockets in the hour-long raid at nightfall, plunging the city into darkness. Among the buildings hit were the Palestinian police headquarters, a building run by Fatah, and the security police headquarters.
Palestinian officials said 62 people were injured in the retaliatory raid, about half of them civilians. Israeli missile boats off the Gaza coast took part in the attack, the Israeli military confirmed. Israel army radio said Palestinian gunmen fired at the helicopters.
Rockets also hit refugee camps around Gaza City, witnesses said -- the first strike on camps in the nearly two-month conflict that has taken at least 238 lives, most of them Palestinians. Doctors said 22 of the wounded came from the Shati camp. Palestinian journalist Abdul Khader Hamad said rockets hit two Fatah offices in Jabaliya camp.
``They shot more than 20 rockets into Jabaliya camp,'' Hamad said. ``We saw everything.'' There were no reports of injuries.
Israel TV reports said a key target was the office of Mohammed Dahlan, head of the Preventive Security Service in Gaza who Israel suspects was behind the bus attack. There was no word on Dahlan's whereabouts.
Earlier, Israeli Prime Minister Ehud Barak called his Cabinet into special session to weigh responses. He was under increased pressure for tough retaliation to the attack on the armored bus, which had been carrying the children to an elementary school in a Jewish settlement in the Gaza Strip.
Three Palestinians set off the bomb, made up of a 122 mm mortar shell, several dozen yards from the bus, as it left the isolated settlement of Kfar Darom Monday morning, the Israeli military said. It riddled the side of the bus with melon-sized holes.
The words, ``This is what we get for restraint,'' were spraypainted in Hebrew on the bus after the explosion.
Israeli Deputy Defense Minister Ephraim Sneh told parliament that the government held Arafat responsible, saying ``tracks lead, apparently, to the military institution of the Palestinian Authority.''
Arafat's administration denied any connection and the Palestinian leader ordered an investigation as he met his security officials. ``We had nothing to do with this incident. We reject any kind of violence,'' said Arafat adviser Nabil Aburdeneh.
In parliament, right-wing opposition leader Ariel Sharon said Barak's government was not doing enough to protect Israeli citizens.
``Jews are being killed in the only country where they have the ability to defend themselves, and the government is not doing all it can to defend them,'' Sharon told a session of parliament.
Three different groups -- Palestinian Hezbollah, Al-Aqsa Martyrs and Omar Al-Mukhtar -- claimed responsibility for the bus attack. The first two have not been active before, and it was not clear whether they had ties to existing Islamic militant groups, which have carried out roadside bombings in Gaza in the bast. The third, Damascus-based Omar Al-Mukhtar, is a little-known splinter of a tiny PLO faction.
Hamas leader Sheik Ahmed Yassin was evasive when asked whether his group was responsible. ``What happened today is a natural outcome of the many deaths on the Palestinian side,'' Yassin said. ``Our targets are not children, but the military.''
Last week, Arafat ordered Palestinians to stop shooting at Israelis from areas under Palestinian control. However, the ban did not refer to attacks in areas of the West Bank and Gaza that remain under Israeli control.
The Gaza road where the mortar shell was detonated is under Israeli security control, while the surrounding area is under Palestinian rule.
The school bus left the isolated Jewish settlement of Kfar Darom in the heart of the Gaza Strip at around 7:30 a.m. Monday. Students and teachers were en route to elementary school in Gush Katif, a bloc of Jewish settlements in the south of the strip.