GAZA, Jan 10 (Reuters) - Palestinian medical workers said cross-border gunfire killed two Palestinians on Sunday in Gaza and Israeli Prime Minister Benjamin Netanyahu vowed a powerful response to rockets fired at Israel from the coastal territory.

A military spokeswoman said she had no reports of any shooting by Israeli troops in the area, but medics said they had been informed by Israeli authorities to retrieve two bodies from a border zone with Israel.

Witnesses said they had heard an explosion in the area but the source of the blast wasn't clear.

Netanyahu, addressing a weekly cabinet session, said 20 mortar bombs and rockets had been fired at Israel from Hamas-ruled Gaza last week, adding I view this very seriously.

The (Israeli) government's policy is clear, any shooting at our territory will receive an immediate and powerful response, the Israeli leader added.

Violence has risen along the Israeli-Gaza frontier in the past month after a long respite since a three-week Gaza war a year ago Israel said it launched to stop rocket fire, and in which 1,400 Palestinians and 13 Israelis were killed.

Three Palestinians were killed in a series of Israeli air strikes in Gaza on Thursday, including the first air raid in months to target a site inside Gaza City.

Netanyahu told his cabinet those air strikes had targeted factories where rockets were manufactured and tunnels along Gaza's border with Egypt, which he said Palestinians used to smuggle in weapons.

Israel also dropped leaflets last week warning Gaza's 1.5 million residents to avoid coming within 300 metres (yards) of the border fence with Israel citing security reasons.

(Reporting by Nidal al-Mughrabi; Writing by Allyn Fisher-Ilan)