Israel announced on Monday the rescue of two hostages in the southern Gaza city of Rafah, where the Hamas-run health ministry said 52 Palestinians including children were killed in heavy overnight air strikes.

Israel is preparing for a ground incursion into the teeming city along the border with Egypt, where hundreds of thousands of displaced Palestinians have sought refuge from fighting further north.

The precarious humanitarian situation in Rafah has prompted aid groups and foreign governments, including Israel's key ally the United States, to express deep concern over the potentially disastrous consequences of expanding operations there.

Hamas has also warned that a ground offensive in Rafah would imperil any future releases of Israeli hostages taken during the October 7 attacks that sparked the war.

The Israeli military announced early Monday morning that two of those hostages had been rescued in a joint military, Shin Bet and police operation in Rafah after nearly 130 days in captivity.

In a statement, the army identified the two as Fernando Simon Marman, 60, and Louis Har, 70, saying they "were kidnapped by the Hamas terrorist organization on October 7th from Kibbutz Nir Yitzhak".

"They are both in good medical condition, and were transferred for medical examination at the Sheba Tel Hashomer hospital," the statement added.

During the October 7 attacks, Palestinian militants seized about 250 hostages, according to an AFP tally based on official Israeli figures. Israel says around 130 are still in Gaza, though 29 are thought to be dead.

Dozens of captives were released during a one-week truce in November that also saw the release of more than 200 Palestinian prisoners held in Israeli jails.

Since then, Netanyahu has faced mounting protests and even calls for early elections, with relatives of the hostages frustrated over the pace of the rescues.

Renewed talks for a pause in the fighting have been held in Cairo, with Hamas open to a fresh ceasefire, including more prisoner-hostage exchanges.

The group's military wing on Sunday said two hostages had been killed and eight others seriously wounded in Israeli bombardment in recent days, a claim AFP was unable to independently verify.

- Overnight strikes -

Despite mounting calls for him to strike a deal with Hamas to secure the captives' release, Netanyahu has insisted that only military pressure can bring them home.

Last week, he said he has ordered troops to prepare for operations in Rafah, the last major city they have yet to enter.

At least 52 people were killed in heavy air strikes in the overcrowded city before dawn on Monday, according to the Hamas-run territory's health ministry.

AFP journalists and witnesses heard an intense series of strikes and saw smoke billowing above the city, which now hosts more than half of Gaza's total population after they fled bombardment elsewhere in the Strip.

The strikes hit 14 houses and three mosques in different parts of Rafah, according to the Hamas government.

The Israeli military said it had "conducted a series of strikes on terror targets in the area of Shaboura in the southern Gaza Strip", adding that the strikes had concluded.

Rafah has become the last refuge for Palestinians fleeing Israel's relentless bombardments in its four-month war against Hamas, which warned it not to launch an offensive there.

"Any attack by the occupation army on the city of Rafah would torpedo the exchange negotiations," a Hamas leader told AFP on condition of anonymity.

US President Joe Biden spoke to Netanyahu by phone Sunday and told him the Rafah advance should not go ahead in the absence of a "credible" plan to ensure "the safety" of people sheltering there, the White House said.

About 1.4 million Palestinians have crowded into Rafah, with many living in tents, while food, water and medicine are becoming increasingly scarce.

Netanyahu had told US broadcaster ABC News the Rafah operation would go ahead until Hamas was eliminated, adding he would provide "safe passage" to civilians wishing to leave.

When pressed about where they could go, Netanyahu said: "You know, the areas that we've cleared north of Rafah, plenty of areas there. But, we are working out a detailed plan."

Hamas's unprecedented October 7 attack on southern Israel resulted in the deaths of about 1,160 people, mostly civilians, according to an AFP tally based on official figures.

Israel has responded with a relentless offensive in Gaza that the territory's health ministry says has killed at least 28,176 people as of Sunday evening, mostly women and children.

Since the start of the war, violence has also surged on the occupied West Bank.

On Sunday, troops near Bethlehem shot a man who tried to stab a soldier, the Israeli army said.

The same day, Israeli police said officers shot dead a knife-wielding suspect in the Muslim quarter of annexed east Jerusalem's Old City.

- 'Demilitarisation' -

During a visit to a military base Sunday, Netanyahu said Israel aims for "the demilitarisation of Gaza".

"This requires our security control... over the entire area west of Jordan, including the Gaza Strip," he said.

The United Arab Emirates, Qatar, Oman and the Organisation of Islamic Cooperation (OIC) were some of the latest to raise the alarm over the plan for Rafah.

"The OIC strongly warned that the continuation and expansion of the Israeli military aggression is part of rejected attempts to forcibly expel the Palestinian people from their land," the 57-nation Jeddah-based bloc said on social media.

Saudi Arabia and the United Arab Emirates also rejected "forced" displacement of people from Rafah, evoking the trauma of Palestinians' mass exodus and forced displacement around the time of Israel's creation in 1948.

Riyadh called for an urgent UN Security Council meeting, while Britain's Foreign Secretary David Cameron said the priority "must be an immediate pause in the fighting to get aid in and hostages out".

Gazans, driven farther and farther south, have repeatedly said they can find no safe refuge from the fighting and bombing.

Farah Muhammad, 39, a mother of five displaced to Rafah from northern Gaza, said she felt helpless.

"There is no place to escape."