* Israel mobilizes reservists for possible border escalation
* Israel says Hamas men killed by their own explosives
* Hamas says Israel will "pay the price" (Adds Israeli denial, preparation for escalation)
By Nidal al-Mughrabi
GAZA, July 7 (Reuters) - Israel called up reserve troops on Monday for a possible escalation of hostilities with Palestinians in the Gaza Strip where Hamas said six of its fighters were killed by air strikes, something Israel denied.
Hamas vowed revenge for what it said were deadliest attacks in a surge of violence since the kidnapping and killing of three Israeli youths and a Palestinian teen.
Palestinian militants kept up their now-daily rocket launchings into Israel as pressure mounted from hardliners in Prime Minister Benjamin Netanyahu's coalition for tougher action against Hamas, the dominant force in the Gaza enclave.
The Israeli military said its aircraft had targeted "terror sites and concealed rocket launchers" in the enclave, but had not hit the southern Gaza area of Rafah, on the Egyptian border, where the Hamas gunmen died.
Military spokesman Lieutenant Colonel Peter Lerner said the militants had died when explosives went off in a smuggling tunnel that Israel had bombed several days ago. The Hamas fighters had apparently gone there to inspect the damage, he said.
Lerner said the rocket fire at Israel from Gaza by Hamas fighters meant that "now the Israeli military is talking about preparedness for an escalation". It had called up several hundred reservists and was prepared to mobilise a total of 1,500, he said.
Israel said about a dozen rockets and mortar bombs were fired from Gaza on Monday, wounding one soldier.
Tensions between Israelis and Palestinians have risen over the killing of three Jewish teenagers in the occupied West Bank, which Israel has blamed on Hamas, and of a 16-year-old Palestinian in East Jerusalem.
Israel on Sunday announced it had arrested six Jewish suspects in what police believe was the revenge murder of Mohammed Abu Khudair, whose charred body was found in Jerusalem on Wednesday, a day after Naftali Fraenkel and Gil-Ad Shaer, both 16, and Eyal Yifrah, 19, were buried.
The three Jewish seminary students went missing while hitchhiking on June 12. Hamas has neither confirmed nor denied having any role in their disappearance.
AIR STRIKES
Hamas's armed wing said six of its members were killed in the air strikes and another was pulled from the rubble, seriously wounded. The death toll was the highest Hamas has suffered since a Gaza war in late 2012.
Hamas spokesman Sami Abu Zuhri accused Israel of committing a "grave escalation" in violence and threatened to retaliate, saying Israel would "pay the price".
Netanyahu has pledged "to do whatever is necessary" to restore quiet to southern Israeli communities. But he also cautioned against any rush toward wider confrontation with Hamas, whose arsenal includes long-range rockets that can reach Israel's heartland and its business capital, Tel Aviv.
Foreign Minister Avigdor Lieberman, citing a rift with Netanyahu on dealing with Hamas, said on Monday his nationalist party was dissolving its merger with the prime minister's conservative Likud but would stay in the governing coalition.
"A situation in which a terrorist group has hundreds of rockets which it can decide any moment to use is intolerable," Lieberman told a news conference. "There have been suggestions that we wait ... but I don't know what we're waiting for."
Abu Khudair's death has touched off clashes between police and stone-throwing Arab protesters in East Jerusalem and in several Arab villages in northern and southern Israel. Police said they arrested 30 people during violence on Sunday night.
The Gaza flare-up began in mid-June, during Israel's search for the three teens, when Israel arrested many Hamas members across the West Bank. The Israeli military says more than 160 Gaza rockets have struck Israel since.
In Gaza, Hamas has been hurt by an Egyptian crackdown on most of its estimated 1,200 cross-border smuggling tunnels, which Egypt says are used to take weapons into the Sinai Peninsula.
Hamas, an offshoot of the Muslim Brotherhood, which Egypt's military-backed government has declared a terrorist organisation, denies Cairo's allegations that it poses a danger to Egyptian security and helps Sinai militants.
Hamas's frustrations have also mounted over the failure of a new unity government, formed under a reconciliation pact with President Mahmoud Abbas's Fatah movement, to pay salaries of Hamas's 40,000 public servants in the enclave. (Writing by Maayan Lubell and Jeffrey Heller; Editing by Robin Pomeroy)
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