* Egypt makes U.S.-backed truce proposal, Israel interested
* Israeli forces kill 42 in school, Israel accuses Hamas
* Fighting dies down, Israel offers "humanitarian corridor"
* Al Qaeda’s Zawahri urges Muslims to hit Western interests
By Nidal al-Mughrabi
GAZA, Jan 7 (Reuters) - Israel and Hamas studied an Egyptian proposal for a ceasefire in the Gaza Strip on Wednesday that won immediate backing from the United States and Europe, hours after Israeli shells killed 42 Palestinians at a U.N. school.
However, Israeli officials also said ministers would discuss a major escalation of their 12-day-old offensive that would push troops deep inside Gaza’s cities and refugee camps in their bid to end rocket salvoes into Israel by Islamist militants.
A Palestinian official said Gaza’s Hamas rulers, who want an end to Israel’s blockade of the enclave, had been briefed in Egypt by President Hosni Mubarak and were debating the proposal. More than 600 Palestinians have been killed in the offensive.
In New York, where the U.N. Security Council met on Gaza, Israeli Ambassador Gabriela Shalev told reporters: "I am sure that (Egypt’s proposal) will be considered and you will find out whether it was accepted. But we take it very, very seriously."
Israel, which has lost seven soldiers and four civilians in the conflict, wants any end to hostilities to satisfy its demand that Egypt cut off Hamas’s supplies of smuggled weapons.
Mubarak made his ceasefire call at a joint news conference in Egypt with French President Nicolas Sarkozy. He gave little detail, but diplomats have described a process that would focus on bringing in foreign forces to seal the Egypt-Gaza border against Hamas arms smugglers while easing other trade routes.
Sarkozy, winding up a two-day tour of the Middle East, said: "I am confident the Israeli authorities’ reaction will make it possible to consider putting an end to the operation in Gaza."
With Washington in a transition period ahead of the Jan. 20 inauguration of President-elect Barack Obama, France and its European partners, with backing from U.S. allies in the Arab world, have been pushing hard for Israel to cease fire.
U.S. Secretary of State Condoleezza Rice endorsed the Mubarak proposal and said a "sustainable" ceasefire should involve both closing off Hamas’s ability to rearm through tunnels from Egypt and easing the lives of the 1.5 million people of Gaza by reopening trade routes.
"We need urgently to conclude a ceasefire that can endure and that can bring real security," Rice told the Security Council.
She welcomed an offer by Israel to open what it called a "humanitarian corridor" that would let aid agencies more easily distribute food and medicine around Gaza while it continues its military operation.
ISRAEL’S FINAL MILITARY PUSH?
For all the talk of a truce, however, Israel is still demanding a stop to all rocket fire — more than 30 hit the Jewish state on Tuesday — and guarantees Hamas cannot rearm.
Prime Minister Ehud Olmert’s security cabinet, due to convene on Wednesday, would debate whether to order their armed forces to storm into the Gaza Strip’s urban centres, the planned culmination of the offensive, political sources said.
They said ministers may defer a vote on approving the plan.
"The plan is to enter the urban centres," one source said, noting the first phase was an air campaign launched on Dec. 27 and the second a ground invasion that began on Jan. 3.
After nightfall on Tuesday, fighting eased to a sporadic explosions and gunfire across Gaza. On Tuesday, 77 civilians were killed, taking the total Palestinian death toll to 631.
Israel says it has killed dozens of militants this week. Arab and widespread international anger mounted on Tuesday when Israel acknowledged hitting a U.N. school where hundreds of people were taking refuge. Medics said 42 people were killed.
Israel accused Hamas of using civilians as "human shields" and said troops had been returning mortar fire from the school.
An aide said Palestinian President Mahmoud Abbas, a bitter foe of Hamas, had ordered officials to look into taking Israel to international courts over the incident. A U.N. spokesman said the world body wanted an inquiry into both the incident and Israel’s allegations about militants firing from schools.
The school killings could intensify pressure on Israel for a ceasefire. During Israel’s 2006 war against Hezbollah, the deaths of 28 unarmed Lebanese in shelling at the village of Qana intensified world pressure on Israel to negotiate a truce.
The deaths in the school prompted Obama to break his silence on the Gaza offensive and to say the loss of life among civilians was "a source of deep concern" for him. Obama said he would not engage in policy until he was in office but vowed to work rapidly thereafter to secure peace in the Middle East.
Al Qaeda’s second-in-command Ayman al-Zawahri called on the Internet for Muslims to "hit the interests of the Zionists and Crusaders wherever and in whichever way you can".
Washington’s allies in Arab governments have condemned the Israeli assault, which has contributed to rising oil prices.
Hamas, which has rebuffed Western demands to recognise the Jewish state, end violence and accept existing interim peace deals, has demanded a lifting of the blockade of Gaza in any truce. It seized the territory in 2007, 18 months after it won a parliamentary election.
That created a schism with Abbas’s Fatah faction that helped kill off the outgoing U.S. administration’s efforts to broker a peace with Israel that would have created a Palestinian state.
(Additional reporting by Dan Williams and Adam Entous in Jerusalem, Aziz el-Kaissouni in Sharm el-Sheikh and Claudia Parsons and Louis Charbonneau at the United Nations; Writing by Alastair Macdonald)