Much of the Gaza Strip was plunged into darkness after night-time air strikes on the plant and three bridges that aimed to prevent militants moving across the territory.
Flames poured into the night sky and the sound of shelling and gunfire from combat helicopters could be heard as troops in tanks, armoured cars and bulldozers moved into southern Gaza where the missing serviceman was believed to be held.
Deputy Prime Minister Shimon Peres said on CNN that Israel was "left without a choice" in the face of inaction by the Palestinian leadership to rescue 19-year-old corporal Gilad Shalit.
"The Israeli offensive in Gaza is intended to bring Gilad Shalit home," Infrastructure Minister Benjamin Ben-Eliezer told public radio.
"We do not intend to reoccupy the Gaza Strip or to make the Palestinian population suffer."
It was the first major ground offensive against Gaza since Israel pulled settlers and troops from the impoverished coastal strip last year in a highly controversial operation that ended a 38-year occupation.
No casualties reported
No casualties were reported in the incursion, which followed intensive mediation efforts to free Mr Shalit after his abduction in an attack on Sunday that also killed two Israeli soldiers and two militants.
Israel massed thousands of troops on the Gaza border as Prime Minister Ehud Olmert ruled out any negotiation with the kidnappers, holding the Hamas-led government and Palestinian president Mahmud Abbas responsible.
The raids followed a landmark agreement on Tuesday between Palestinian factions on an political initiative that implicitly recognises Israel's right to exist, a historic policy shift by Hamas which has long advocated the destruction of the Jewish state.
Israel dismissed the deal however as an "internal matter".
The situation on the ground was further complicated when an armed
Palestinian group claiming to hold the soldier also threatened to kill a Jewish settler it said it had abducted in the occupied West Bank.
Abducted settler
"Unless the aggression stops, we will kill the settler," said a representative of the Popular Resistance Committees, which claimed Sunday's attack along with the armed wing of Hamas and another group.
Although there has been no official Israeli confirmation of the settler kidnapping, one couple reported their son missing after he failed to return home on Monday.
The Gaza incursion came amid international appeals for restraint over the kidnapping which has triggered the worst Middle East crisis since the militant Islamist movement Hamas took office in March.
It also presented the first major security challenge for Mr Olmert since he took office in May pledging to unilaterally redraw the map of Israel even without negotiations with the Palestinians.
Egypt, France and the Vatican, as well as key Israeli ally the United
States, sought to exert pressure on the Palestinians to hand over the soldier.
Israel said it concentrated its forces a few kilometres into southern Gaza where it believed Mr Shalit was being held, including the area of Dahaniyeh near the destroyed airport.
No plans to go deeper
"We have no immediate plans to go deeper in. That could change but that's the situation right now," an army spokesman said.
At one point troops were attacked by light arms fire and possibly an anti-tank missile, but there were no reports of any casualties, he said.
Palestinian militants also fired four rockets into southern Israel from Gaza, without causing any injuries.
Bracing for the offensive, militants had erected earthen mounds across roads and sealed off entrances to refugee camps in parts of Gaza, one of the most densely populated regions on earth.
Men, women and children packed into cars and a horse-drawn cart fled into Rafah from areas to the east as Israeli troops entered the territory while armed gunmen prowled the streets.
"All the people are leaving. They're heading west because we're afraid of the sweep, we're escaping the invasion," said Auda Adwan, 20.
Armed groups have vowed not to release the soldier until all Palestinian women and children are freed from Israeli jails, a demand already rejected by Mr Olmert.
Past history of soldiers kidnapped at the hands of Palestinians bodes ill for Mr Shalit, with all nine such previous cases ending in death.
Meanwhile, Hamas and the rival Fatah movement announced a deal drawn up by Palestinian prisoners that implicitly recognises Israel's right to exist by calling for a Palestinian state on land conquered in 1967.