JERUSALEM - Israeli leaders decided Wednesday against a large-scale military response to repeated rocket fire from the Gaza Strip, but they said they would consider cutting off electricity or other vital supplies to the impoverished area if the attacks persist, meeting participants said.

Prime Minister Ehud Olmert convened the gathering of his Security Cabinet, a group of top ministers and defense officials, to discuss the latest wave of rockets. Pressure has been mounting for a tough response since a rocket landed next to a crowded nursery school in the southern town of Sderot on Monday. There were no injuries.

Olmert instructed the army "to reduce the rocket fire on Sderot as much as possible," said one participant. However, there will not be a large military operation for the time being, another official said. He added that Israel would consider cutting electricity, water or fuel supplies to Gaza in response to more attacks.

The officials spoke on condition of anonymity because they were not authorized to discuss such sensitive matters with the media. Olmert's office had no immediate comment.

A number of senior officials have endorsed the idea of cutting off basic supplies to Gaza, which relies on Israel for water, power and fuel.

"I believe there is a range of steps Israel can take without creating a humanitarian crisis in Gaza, in order to send a message to Hamas and the rest of the terror groups," said Foreign Minister Tzipi Livni, who left the Security Cabinet meeting to attend a news conference with the visiting Italian foreign minister.

Islamic Jihad, a radical Palestinian militant group, has carried out this week's rocket fire. But Israel says it holds Hamas, which seized control of Gaza in June, responsible for ensuring quiet there.

Despite the tough rhetoric, Israel's options could be problematic. Broad military operations in the past have failed to stop the rocket fire while causing heavy casualties on both sides. Moves to cause widespread suffering, such as cutting off power, would likely bring harsh international condemnation.

Israel routinely conducts brief incursions and airstrikes in Gaza aimed at halting rocket squads. On Wednesday, Israeli tanks and bulldozers moved into the northern Gaza Strip. Later, the forces were seen bringing four launchers out of the Gaza Strip.

The pressure for tougher action has grown since Monday's rocket attack in Sderot, which landed next to the day-care center shortly after children arrived. No one was hurt, but scenes of panicked mothers racing to comfort their terrified children were repeatedly broadcast on Israeli television.

Sderot residents refused to send their children to school on Wednesday and planned a large demonstration near Olmert's office in Jerusalem to demand the government stop the rockets.

"The government should declare a state of emergency," Sderot resident Alon Davidi told Army Radio. "Gazans shouldn't be able to have normal lives until the last child in Sderot can walk peacefully and calmly in the street."

The rocket fire has persisted almost daily for six years. Although the rockets are inaccurate, they cause widespread panic in communities near Gaza and can be deadly. Twelve people have died in rocket attacks.

The rockets have perplexed the high-tech Israeli military, which has been unable to develop a way to halt the crude rockets, which lack navigation systems and are in the air for a very short time.

A diplomatic option seems unlikely since Israel does not speak to Hamas, which has killed hundreds of Israelis in suicide bombings and refuses to renounce violence. Hamas grabbed control of the Gaza Strip in June in bloody fighting with forces affiliated with Palestinian President Mahmoud Abbas' Fatah Party.

Abbas has since fired Hamas from the unity government, leaving Fatah in control in the West Bank and Hamas ruling the Gaza Strip. Israel and the international community have embraced Abbas' government, while isolating Gaza's rulers.

The Israeli meeting came as Tony Blair was in Jerusalem in his new role as representative of the "Quartet" of Middle East mediators.

The former British prime minister, who was meeting with Israeli and Palestinian officials, is expected to be in the area for about 10 days before reporting at the end of the month to the Quartet, which includes the U.S., Russia, the European Union and the UN.

The Blair visit is part of a new international diplomatic push aimed at reviving peace efforts.

Olmert and Palestinian President Mahmoud Abbas plan to meet in the coming days before a visit to the region by Secretary of State Condoleezza Rice on Sept. 18, said Palestinian negotiator Saeb Erekat.

Rice is trying to push the sides into agreeing on an outline for a future peace agreement ahead of a U.S.-sponsored conference in November.