After the Israeli military discovered the bodies of the three missing youths, prime minister Benjamin Netanyahu vowed: "Hamas is responsible and Hamas will pay."
But Hamas spokesman in Gaza, Sami Abu Zuhri, warned Israel against any broad offensive. Gaza militants possess thousands of rockets and would almost certainly unleash heavy barrages at Israel if it attacks.
He said: "Netanyahu should know that threats don't scare Hamas, and if he wages a war on Gaza, the gates of hell will open on him."
Mr Netanyahu said the teenagers "were kidnapped and murdered in cold blood by human animals", as he convened an emergency meeting of his security cabinet.
The three-hour session ended after midnight without any decisions, and officials are expected to resume deliberations later today.
The episode has put Mr Netanyahu in a difficult position. With a public enraged over the deaths, the Israeli leader has widespread support to strike Hamas, but after a two-week crackdown against the group, he could have a tough time finding new targets. He is also facing international calls for restraint.
Eyal Yifrah, 19, Gilad Shaar, 16, and Naftali Fraenkel, a 16-year-old with dual Israeli-American citizenship, disappeared on June 12 while hitchhiking home from the Jewish seminaries where they were studying near the West Bank city of Hebron. Despite the dangers, hitchhiking is common among Israelis travelling in and out of Jewish settlements in the West Bank.
In an operation codenamed Brother's Keeper, Israel dispatched thousands of troops across the West Bank in search of the youths, closed roads in the area and arrested 400 Hamas operatives throughout the territory. The search ended yesterday afternoon with the discovery of the bodies under a pile of rocks in a field north of Hebron.
Israel has identified two well-known Hamas operatives from Hebron as the primary suspects. The men, Marwan Qawasmeh and Amer Abu Aisheh, remain on the run and military officials said the search for them would continue.
The search for the teenagers became a national obsession. Israeli media delivered round-the-clock updates, senior officials held daily televised briefings and Israelis held prayer vigils. The mothers of the three teenagers became public figures as they campaigned for their sons' return, at one point travelling to Geneva to address the UN Human Rights Council.
News of their deaths prompted an outpouring of grief. Large crowds of supporters rushed to the homes of the families in the central Israeli towns of Nof Ayalon and Elad, and the West Bank settlement of Talmon, while supporters lit memorial candles and prayed.
Large crowds gathered in Tel Aviv's central Rabin Square, and at the West Bank junction where the youths were abducted, singing songs, praying and lighting candles shaped in the names of the youths or the Jewish Star of David.
"All of Israel bows its head today," said president Shimon Peres.
Beyond identifying the suspected kidnappers, Israel has not publicly provided evidence proving the involvement of Hamas, which has praised the kidnappings but not claimed them. It is also not clear whether the kidnappers received orders from higher up or acted on their own.
News of the deaths generated condemnation from around the world. Pope Francis, who in May visited the region, shared in the families' "unspeakable pain", said Vatican spokesman the Rev Federico Lombardi.
In Washington, president Barack Obama sent his "deepest and heartfelt condolences" to the families. "As a father, I cannot imagine the indescribable pain that the parents of these teenage boys are experiencing," he said. Yet he urged "all parties" to refrain from steps that could further destabilise the situation.
UN secretary-general Ban Ki-moon issued a similar condemnation of the "heinous crime", but also urged the sides to "refrain from any actions that could further escalate this highly tense situation".
Israel's military said a Palestinian was shot dead when he threw a grenade at forces carrying out an arrest raid hours after the discovery of the bodies of the Israeli teenagers.
A spokesman said the clash occurred in the West Bank town of Jenin. It was the first casualty since the bodies were found.
The military also struck 34 targets across the Gaza Strip overnight after more than 20 rockets were fired from the territory into Israel since late Sunday.