* Israel says fired at "military targets" in Gaza
* Hamas says Gaza incendiary balloons to continue
* Israel threatens broader military action in Gaza
By Nidal al-Mughrabi
GAZA, July 20 (Reuters) - Israeli fire killed three Palestinians during protests in the Gaza Strip on Friday, Palestinian health officials said.
The Israeli military said its troops had come under fire from Gaza and that aircraft and tanks had fired at "military targets throughout the Gaza Strip".
Two of the Palestinian dead were killed east of Khan Younis in the central Gaza Strip, Gaza health ministry officials said, and a third in Rafah, further south. They said an Israeli tank shell struck close to the Khan Younis protest and that the two dead were civilians.
Hamas had earlier on Friday defied Israeli calls to stop launching incendiary balloons from the Gaza Strip, as Israel's defence minister threatened to order a military offensive to stop them.
Fires caused by flame-carrying Palestinian kites and helium-filled balloons have ravaged tracts of farmland in Israel in recent months.
The tactic has become popular during the months-long Gaza border protests known as 'The Great March of Return', in which more than 140 Palestinians have been killed by Israeli security forces.
Palestinians have held the border protests to demand the right to return to homes and villages from which they fled or were driven out during the conflict surrounding the creation of the modern state of Israel in 1948. But more recently some Gaza officials said the protests would end if Israel lifted an economic blockade of the Strip.
Israel says Hamas has been orchestrating the demonstrations to provide cover for militants' cross-border attacks. Hamas denies this.
Israel has vowed to stop the kite attacks, even at the risk of a wider conflict. But Khalil Al-Hayya, Hamas's deputy chief in Gaza, said on Friday the kites would continue to fly.
"In the face of Zionist threats, we say the resistance will continue, the marches will continue and its tools will continue to vary and take different forms, including the kites," he said.
Visiting the Israeli town of Sderot on Friday, Defence Minister Avigdor Lieberman reiterated Israeli demands that Hamas stop the kite fliers.
"We are trying to be balanced and responsible but Hamas's leaders are forcing us into a situation in which we will have no choice but to embark on a broad and painful military operation," Lieberman said.
"I think responsibility will fall entirely on Hamas's shoulders, but I'm sorry to say that ordinary Gazans will have to pay the price."
Hayya also said on Friday that Hamas was holding two Israeli soldiers that Israel had declared killed in action during a 2014 war in Gaza.
He said they would only be returned as part of a deal similar to that in 2011 which saw a captured Israeli soldier, Gilad Shalit, released in exchange for more than 1,000 Palestinians jailed in Israel.
"Your soldiers are still in our hands ... The occupation (Israel) will not see them until they pay the price, just like they did for Shalit," Hayya said. (Writing by Ori Lewis Editing by Gareth Jones)
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