The Israeli military said it carried out a series of airstrikes Tuesday across the Gaza Strip in response to the renewed rocket fire.
The breakdown in the truce talks happened just hours before a midnight deadline, leaving the fate of the negotiations in question and raising the possibility of a resumption of heavy fighting.
"The Cairo talks were based on an agreed premise of a total cessation of hostilities," Israeli government spokesman Mark Regev said. "When Hamas breaks the cease-fire, they also break the premise for the Cairo talks. Accordingly, the Israeli team has been called back as a result of today's rocket fire."
He would not say whether the team would return to Cairo, or whether Israel would resume cease-fire talks. There was no immediate Egyptian comment, but a Hamas official declared the talks over.
The breakdown dealt a harsh blow to nearly a week of Egyptian-led diplomacy meant to end weeks of fighting that has killed more than 2,000 Palestinians, most of them civilians, according to Palestinian and U.N. officials. Sixty-seven Israelis, including three Israelis, have also been killed. It has been the heaviest fighting between Israel and Hamas since the Islamic militant group seized control of Gaza in 2007.
Hamas is seeking an end to a seven-year Israeli-Egypt blockade that has ravaged Gaza's economy, while Israel wants guarantees that Hamas will disarm.
In nearly a week of indirect talks, Egypt appears to have made little headway in resolving the differences. Late Monday, it secured a 24-hour extension in a temporary truce to allow more time for a last-ditch attempt to reach a longer term deal.
An Egyptian compromise proposal calls for easing the blockade, but not lifting it altogether and opening the territory's air and seaports as Hamas has demanded.
While the plan does not require Hamas to give up its weapons, it would give Western-backed President Mahmoud Abbas, whose forces were ousted by Hamas in 2007, a foothold back in Gaza, running border crossings and overseeing internationally-backed reconstruction. Abbas' presence would minimize friction with Israel and allow large amounts of international aid to flow into Gaza for reconstruction.
But hours before Tuesday night's deadline, Palestinian militants fired three rockets into Israel. The military said the rockets landed in open areas near the southern Israeli city of Beersheba. Later, Israel said it intercepted two more rockets over southern Israel.
Hamas police officials in Gaza said there were at least 25 airstrikes across Gaza. Medical officials said seven people were wounded, including two children.
In Cairo, the head of the Palestinian delegation, which is comprised of various factions, said no progress had been made in Tuesday's talks, but expressed hope they could still succeed.
"We gave the Egyptians our final position. We are waiting for them to come back with a response," said Azzam al-Ahmed, a close aide to Abbas.
But a Hamas official said the talks had collapsed. He spoke on condition of anonymity because he was not authorized to discuss the negotiations with journalists.