Israel vows to continue its imposition of collective punishment on the 1.5 million residents of Gaza until its captive soldier is released.

The Israeli threat came after Prime Minister Ehud Olmert said he had "been generous" and had agreed to release 320 of the 450 Palestinians that Hamas wants freed in exchange for captive soldier Gilad Shalit.

"Hamas' demands reached such proportions that in our assessment no Israeli government could accept," Israeli Justice Minister Daniel Friedman told reporters after Olmert met behind closed doors with his cabinet on Tuesday.

According to Olmert, from a wider truce to allowing reconstruction aid into the strip all depend on whether Hamas gives in to the prisoner swap demands.

"The crossings ... are operating at a minimum to prevent a humanitarian crisis in Gaza," an Israeli political source said. "And they (the crossings) will remain so until Gilad Shalit is released."

Considered the lifeline for the territory, the crossings into Gaza have been sealed on Israeli orders, allowing less than the bare necessities of life to reach the Gazans -- who fight death on a daily basis due to the ongoing 20-month blockade.

The closure of the crossings has also forced Gazans to rely on underground tunnels for imports of vital supplies via Egypt. The tunnels, however, are bombed by Israel.

Hamas, which took control of the strip in 2007 after it was democratically elected by the Palestinian nation, says it is Israel that is blocking the prisoner swap deal.

Israel has long waged an abduction campaign, imprisoning Palestinians on a regular basis and using them as leverage to pressure the nation -- whose homeland has been occupied by Israelis.

The Israeli kidnappings have prompted Hamas to demand the release of 1,450 Palestinians, including 450 long-serving inmates, in exchange for the release of Shalit.

On the issue, senior Hamas official Osama Hamdan said Olmert would be wise to "listen to the voice of reason and come back to pursue the talks".

"If the Israeli government sticks to its negative position, it will not be possible to clinch a deal, at least at the present time," he continued. "If Israel wants to reach a deal, it should come with a serious offer."

Hamas says if Israel continues to "hinder" the proposed prisoner swap deal, its soldiers will kidnap more Israeli soldiers to free the Palestinians from Israeli jails.

"Israel is the one that hindered Shalit's deal" and "we will kidnap more Israeli soldiers to free our prisoners in Israeli jails," Hamas said Wednesday.

Shalit was captured by Palestinian fighters in June 2006.