- Netanyahu says Israel will respond to rocket fire
* Three Palestinians killed in air strike in Gaza
(Updates with three killed in Gaza air strike, edits)
By Nidal al-Mughrabi and Allyn Fisher-Ilan
GAZA/JERUSALEM, Jan 10 (Reuters) - Three Palestinian militants were killed in an Israeli air strike in the Gaza Strip on Sunday, hours after Prime Minister Benjamin Netanyahu vowed a "powerful response" to any attacks from the territory.
An Israeli army spokesman said an Israeli aircraft carried out an air strike against militants spotted preparing to launch rockets towards Israel.
Palestinians said the three militants were killed in a field often used to launch rockets towards Israel.
Netanyahu told a weekly cabinet session 20 mortar bombs and rockets had been fired at Israel from the Hamas-ruled territory last week. "I view this very seriously. The government's policy is clear, any shooting at our territory will receive an immediate and powerful response," he said.
Violence has risen along the Israeli-Gaza frontier in the past month, which could further complicate U.S.-backed diplomacy in the region, after a respite following a three-week Gaza war a year ago in which 1,400 Palestinians and 13 Israelis died.
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.
LEAFLET DROP
Palestinians said the targets were sites belonging to other militant groups, not Hamas Islamists who seized the territory in 2002 and are seen as having reined in violence since the Israeli offensive last January.
Israel also dropped leaflets warning Gaza's 1.5 million residents to avoid coming within 300 metres (yards) of the border fence with Israel, citing security reasons.
Netanyahu told his cabinet Israel had targeted factories used to were make rockets and tunnels along Gaza's border with Egypt, where "Iran smuggles in missiles and rockets" into Gaza, naming an arch-foe Israel accuses of arming militants.
Turning his attention to the occupied West Bank, where Western-backed Palestinian President Mahmoud Abbas' Fatah movement holds sway, Netanyahu demanded leaders there "stop incitement" that violated a U.S.-backed peace road map.
He charged a public square had been named in the West Bank for a militant involved in a lethal 1978 bus attack in Israel, and that three other militants Israel killed after they gunned down a Jewish settler have been hailed as martyrs.
"This is not the way to make peace," Netanyahu said.
Abbas has refused to resume negotiations with Israel, stalled for a year, before a halt to Jewish settlement building in the West Bank which Palestinians see as an obstacle to achieving a two-state solution of their conflict with Israel.
Abbas has rejected a limited, 10-month halt to settlement building announced by Israel in November as insufficient. (Editing by Jon Boyle)