Overnight and during the early morning hours, Gaza-based terrorists fired at least 200 rockets and mortar shells into southern Israel.
The military said that it identified 36 rockets fired from Gaza at Israel and that the Iron Dome defense system intercepted several of them. Israeli media reported that army officials had later acknowledged a mistake had been made and the militants had not been firing at soldiers, though the military would not confirm that information to AFP.
Sirens sounded in Israeli areas near Gaza, warning residents to seek immediate shelter, the Israeli army said.
The spokesperson of the Palestinian Health Ministry in Gaza, Ashraf al-Qadra, confirmed that among the three killed Palestinians was a 23-year-old pregnant mother along with her 18-month-old toddler.
It was not clear if the escalation, the latest in a series of intense exchanges of fire in recent months, would derail the indirect negotiations between Israel and Gaza's Hamas militant rulers.
According to eyewitnesses, at least 12 successive explosions were heard as Israeli warplanes flew over Gaza City, hitting a popular cultural centre.
The flare-up came after officials on both sides had talked about potential progress in U.N and Egyptian efforts to broker a truce to end months of simmering violence.
The rockets came after two Hamas fighters were killed by Israeli fire on Tuesday.
As alert sirens continued to go off in southern Israel, Hamas issued a statement saying "We are delivering on our promise".
"The Hamas terrorist organization is responsible for everything in and out of the Gaza Strip and will bear the consequences for the acts of terror perpetrated against Israeli civilians", the IDF said.
"The Israeli strike was conducted in response to the rockets launched from the Gaza Strip at Israeli territory over the course of the evening and night", it said in a statement.
The majority hit open fields and caused no damage but several landed in Gaza border communities, including the college city of Sderot.
The Israeli Ministry of Defense (MoD) released the first images of the coastal defense barrier that it is constructing in the sea on the country's maritime border with the Gaza Strip on 5 August. According to reports, it would be the relative of a senior Hamas commander.
Neither the United Nations nor Egypt has publicly discussed its plans for a renewed Gaza cease-fire, but they said it would bring economic relief to Gaza's 2 million residents experiencing shortages under crippling blockades. "I very much hope that we are on the brink of a new day on the matter of Gaza", he told reporters. Since then, the group has fought three wars with Israel, most recently in 2014, which has seen deaths and injuries of thousands of civilians and has left much of Gaza is ruin.
The Swedes were all activists from the "Ship to Gaza" group who were attempting to break Israel's blockade and bring supplies including medical equipment to Gaza, while the remaining five people on the boat included three crew members from Canada, France and Germany, and two British journalists.