Jerusalem (CNSNews.com) - Israeli troops massed along the Gaza Strip border on Monday, ready to launch a major ground offensive if a kidnapped Israeli soldier is not returned immediately.

Israel said it is holding P.A. Chairman Mahmoud Abbas and his Hamas-led government responsible for the early Sunday morning assault on an Israeli army outpost at Kerem Shalom on the Gaza-Israeli border near Egypt. Two Israeli soldiers were killed, four wounded and a seventh wounded and kidnapped in the sneak attack.

Palestinian gunmen tunneled half a mile under the Gaza border fence, came up 975 feet into Israel and attacked the outpost and a tank from behind, the army said.

Two Palestinians were killed in the ensuing battle. The remaining terrorists blew a hole in the fence and retreated back into Gaza, taking Israeli soldier Corporal Gilad Shalit with them.

Israeli Prime Minister Ehud Olmert and top ministers involved in security decisions gave the army the go-ahead to prepare for battle in the Gaza Strip and said they were holding the P.A. responsible for Shalit's well-being.

"No person or organization will have immunity at this time," the cabinet said in a statement.

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"We will respond, and the response will be mighty. It won't be an operation of one or two days. A border has been crossed," Olmert was quoted as saying at the meeting.

Israeli parliamentarians from across the board called for a tough military response but on Monday, all attention was focused on obtaining the release of the Shalit, and military action had been put on hold.

"It is clear to everyone that if [Shalit] is not released immediately, we will act to release him," said Foreign Ministry spokesman Mark Regev. "If he is released immediately it will do much to de-escalate the crisis."

Diplomatic efforts were underway on Monday to obtain the release of the soldier. Egyptian officials were said to be involved in the process. It is not clear where Shalit is being held or who is holding him.

This is the first time in more than 10 years that Palestinian terrorists have succeeded in kidnapping a soldier.

Israeli Army chief Lt.-Gen. Dan Halutz said that it was clear that Hamas was involved in the attack: "Hamas is involved in this from the foot to the head," he said, suggesting involvement at the top level of the Hamas-led government.

Speaking in Hebrew to journalists, Hamas spokesman Ghazi Hamad called on Israel not to escalate the situation.

According to some reports, Syrian-based Hamas leader Khaled Mashaal authorized the operation, which some claimed was in retaliation for the Israeli air raid in which Popular Resistance Committee head Jamal Abu Samhadanah was killed just over two weeks ago.

The Hamas-led government had named Samhadanah to reform the P.A.'s security services. He had been on Israel's most-wanted list.

One Palestinian group said that Shalit had been kidnapped and would be used as a bargaining chip in exchange for Palestinian prisoners.

Abbas said in a statement that he was surprised by the attack. He called on the international community to intervene to prevent any Israeli incursion into crowded Gaza. He said it was the Palestinian people who would bear the cost.

But Regev said everyone understands that Israel has "legitimate rights" to bring about the release of its serviceman held hostage by terrorists.

France said it had contacted Abbas in an effort to bring about the release of Shalit, who also has French citizenship.

U.S. Ambassador to Israel Richard Jones said the attack demonstrated the Hamas' government's inability to "control its own ranks," much less provide for the Palestinians.

"The world should think very hard how we deal with such an entity that even control its own house," Jones said on the radio.

Palestinians rejoiced over the news of the attack. Drivers honked their horns and some people distributed candy on the streets.

The assault came less than a week after Abbas met with Olmert informally in Jordan - and Olmert announced that he would hold more than one official meeting with Abbas soon.

According to Regev, Israel is dealing only with the current crisis at the moment but he said that Abbas could use the situation to improve relations with Israel.

"If Abbas were to facilitate the release of this hostage that would do much to foster confidence and could energize the political process," said Regev.