An Israeli soldier and 41 Palestinians have been killed since Israel launched the operation on Wednesday, when it moved tanks and troops into the Gaza Strip and re-occupied land it pulled out from last September.
Israel is trying to secure the release of a young soldier kidnapped by militants two weeks ago.
On Sunday afternoon, one bystander was killed and seven Palestinians wounded when an Israeli aircraft fired two rockets at a car carrying three members of the armed wing of the ruling Hamas party, near the town of Rafah.
The vehicle, which apparently had explosives on board, blew up.
A second attack targeted a building the Israeli military said was used as a weapons depot by the militant group Islamic Jihad.
No let-up: Israel
Despite the mounting death toll, Israel has rejected a call by Palestinian Prime Minister Ismail Haniyah for a mutual ceasefire, vowing to maintain the offensive until Palestinian rocket attacks cease and the 19-year-old soldier, Corporal Gilad Shalit, is returned safe and sound.
"This is a war which can not be given a timetable," Mr Olmert told ministers at the weekly cabinet meeting.
"We will continue managing this crisis with cool and patience... We can not sit and not react to the Qassam rocket fire."
He said there are no plans to reoccupy Gaza, "but if certain operations are needed they will be carried out".
Defence Minister Amir Peretz conceded during the meeting that "so far there has been no success, but we require patience and restraint".
"The army's action in the Gaza Strip creates reactions and situations that will help bring about the release of the kidnapped soldier Gilad Shalit," added the defence minister, who has been publicly criticised over the crisis.
Palestinian militants fired two rockets into Israel's southern desert town of Sderot, where Mr Peretz lives, lightly wounding one man.
On Sunday, the Israeli army disclosed that an Israeli soldier shot dead in northern Gaza on June 28 was killed by friendly fire, after initial suspicions he was shot by a Palestinian sniper.
Soldier "fine"
Hamas has warned that Israel's military assault is complicating the fate of the corporal, who it said is being well looked after.
Mr Haniyah on Saturday stressed that his government is determined to solve the problem through diplomatic channels in a "peaceful" manner, calling on Israel to halt its military operation.
Israel, however, has vowed to use everything in its power to increase the pressure on the Hamas-led government to free the soldier and stop rocket attacks that have sowed panic among Israelis living near Gaza.
Israeli ground troops on Saturday shifted the focus of their Gaza campaign, leaving the north in favour of the eastern frontier of the narrow Mediterranean territory -- one of the most densely populated regions on earth.
Tanks advanced one kilometre to the eastern outskirts of Gaza City where deadly clashes broke out on Saturday, taking up positions on open farmland and in industrial areas to search for explosives and militant tunnels.
Sombre funerals took place Sunday for three members of a Palestinian family -- a six-year-old girl, her 20-year-old brother and their mother -- who were killed in an air strike late on Saturday.
As the violence drags on amid fears of basic shortages and with petrol stations still closed in Gaza City, UN chief Kofi Annan demanded immediate access for UN workers and humanitarian relief supplies to Gaza.
He called for an immediate halt to Israel's "disproportionate use of force" and for militants to release Shalit.