Three Israeli hostages killed mistakenly in Gaza by Israeli forces had been holding up a white flag, a military official says, citing an initial inquiry into the incident that has shaken the country.

A soldier saw the hostages emerging tens of metres from Israeli forces on Friday in Shejaiya, an area of intense combat in northern Gaza where Hamas militants operate in civilian attire and use deception tactics, the official said.

“They’re all without shirts and they have a stick with a white cloth on it. The soldier feels threatened and opens fire. He declares that they’re terrorists. They (the Israeli forces) open fire. Two (hostages) are killed immediately,” the official told reporters in a phone briefing.

The third hostage was wounded and retreated into a nearby building where he called for help in Hebrew, the official said.

“Immediately the battalion commander issues a ceasefire order, but again there’s another burst of fire towards the third figure and he also dies,” the official said.

“This was against our rules of engagement,” he added.

The military identified the three hostages killed in Shejaiya, an eastern suburb of Gaza City, as Yotam Haim and Alon Shamriz, abducted from Kibbutz Kfar Aza, and Samer Al-Talalka, abducted from nearby Kibbutz Nir Am.

Alon Shamriz, Samer Al-Talalka and Yotam Haim. Photo: AAP

Hamas militants rampaged through Israeli towns killing 1200 people and capturing 240 hostages on October 7. Israel then launched a counter-attack, during which Gaza health authorities say close to 19,000 people have been confirmed killed.

Around 300 people turned out to mourn Al-Talalka, 25, at his funeral on Saturday in his hometown of Hura, in southern Israel.

“We had so many hopes, expectations, that he would come back to us,” his cousin, Alaa Al-Talalka told Israel’s public broadcaster Kan from his Bedouin community’s mourning tent.

“We’re not going to start pointing fingers, who is guilty and who is not. It is just not the time,” Al-Talalka said.

“The families are thinking only of how to bring the hostages back alive. This is the time to ask for the war to end.”

More than 100 hostages remain in Gaza, held incommunicado despite Israeli calls for Red Cross access.

More than 100 women, children, teens and foreigners were released in a deal struck in late November. Others have been declared dead by Israeli authorities.

The news on Saturday that three had been killed by Israeli forces prompted a late-night protest outside Israel’s defence headquarters in Tel Aviv, where hostage families were expected to deliver a statement later on Saturday.

One father said each day left families guessing whether they will be next to receive bad news.

“We’re in a kind of Russian roulette,” Ruby Chen, whose son Itay is captive in Gaza, told reporters as he held up an hour glass.

Itay Chen’s father holds an hourglass during a rally calling for the return of the hostages. Photo: AAP

“Israel’s government needs to get a grip and bring back the hostages.”

Mossad and Qatar officials meet

The head of Israel’s Mossad spy agency has met Qatar’s prime minister in Europe, according to a source with knowledge of the matter, as attention turns to a possible new Gaza truce and a prisoner and hostage deal.

Israel bombarded targets across Gaza on Saturday, but two Egyptian security sources said Israeli officials now appeared more willing to work towards a ceasefire and an exchange of Palestinian prisoners for Israeli hostages held by Hamas.

The meeting between David Barnea and Prime Minister Mohammed bin Abdulrahman Al Thani late on Friday was apparently the first between senior officials from Israel and Qatar, which has been acting as a mediator, since the collapse of a seven-day ceasefire in late November.

In another sign of a possible breakthrough, Israeli media said Prime Minister Benjamin Netanyahu would convene his security cabinet and deliver a televised statement on Saturday evening local time. Netanyahu’s office did not immediately confirm that.

Combat has intensified in the past two weeks since the collapse of the truce that had allowed dozens of Israeli hostages held in Gaza to be released in exchange for Palestinian prisoners in Israel.

President Joe Biden’s national security adviser, Jake Sullivan, has urged Israel to scale down its Gaza campaign and transition to more narrowly targeted operations against Hamas leaders, US officials said.

Israeli officials publicly emphasised that they would continue the war until they eradicate Hamas.

Houthi attack widens conflict

In signs of the wider ramifications of the conflict, Yemen’s Iranian-backed Houthis said they had attacked the Israeli Red Sea resort of Eilat with a swarm of drones, one of several drone incidents reported in the region on Saturday.

Two major freight firms said they would avoid the Suez Canal as the Houthis stepped up attacks on commercial vessels in the Red Sea.

US Central Command said the destroyer Carney had shot down 14 Houthi drones in the Red Sea. Britain also said one of its warships had shot down a suspected attack drone targeting merchant shipping.

—AAP