* Deadliest attacks in surge of violence
* Tensions exacerbated by kidnapping, killing of youths
* Hamas says Israel will "pay the price" (Adds soldier wounded, clashes, background)
By Nidal al-Mughrabi
GAZA, July 7 (Reuters) - Israeli air strikes killed seven Hamas militants in the Gaza Strip on Monday, the Islamist group said, in the deadliest attacks in a surge of violence exacerbated by the kidnapping and killing of three Israeli youths and a Palestinian teen.
The Israeli military said its aircraft targeted "terror sites and concealed rocket launchers across the Gaza Strip", after about 25 projectiles were fired into Israel on Sunday.
Rocket fire from Hamas-controlled Gaza continued on Monday and one Israeli soldier was wounded, the army said.
Tensions between Israelis and Palestinians have risen over the killing of three Jewish teenagers in the occupied West Bank, which Israel has blamed on Hamas, and of a 16-year-old Palestinian in East Jerusalem.
Israel on Sunday announced it had arrested six Jewish suspects in the apparent revenge murder of Mohammed Abu Khudair, whose charred body was found in Jerusalem on Wednesday, a day after Naftali Fraenkel and Gil-Ad Shaer, both 16, and Eyal Yifrah, 19, were buried.
The three Jewish seminary students went missing while hitchhiking on June 12. Hamas has neither confirmed nor denied having any role in their disappearance.
Hamas's armed wing said six of its members were killed in air strikes at a "resistance location" in the southern town of Rafah, at the Egyptian border early on Monday, a possible reference to a smuggling tunnel. It said aircraft also attacked in northern Gaza, killing one Hamas fighter.
Prime Minister Benjamin Netanyahu pledged to his cabinet on Sunday "to do whatever is necessary" to restore quiet to southern Israeli communities.
But he also cautioned against any rush toward wider confrontation with Hamas, Gaza's dominant militant group, whose arsenal includes long-range rockets that can reach Israel's heartland and its business capital, Tel Aviv.
Far-right members of Netanyahu's cabinet and politicians in Israel's south have pushed for a stronger response to the rocket fire that has disrupted life for many Israelis living in the region, where air raid sirens send them running for shelter.
Hamas spokesman Sami Abu Zuhri, speaking after the six Hamas men were reported killed, accused Israel of committing a "grave escalation" in violence and threatened to retaliate, saying Israel would "pay the price".
Abu Khudair's death has touched off clashes between police and stone-throwing Arab protesters, which continued on Sunday night in East Jerusalem and in several Arab villages in northern and southern Israel. Police said they arrested 30 people.
The Gaza flare-up began in mid-June, during Israel's search for the three teens, when Israel arrested many Hamas members across the West Bank. The Israeli military says more than 160 Gaza rockets have struck Israel since.
In Gaza, Hamas has been reeling over an Egyptian crackdown on most of the estimated 1,200 cross-border smuggling tunnels run by the group, which Egypt says are used to take weapons into the Sinai Peninsula.
Hamas denies Egyptian allegations it backs the Muslim Brotherhood and helps Sinai militants.
Hamas frustrations have also mounted over the failure of a new unity government, formed under a reconciliation pact with President Mahmoud Abbas's Fatah movement, to pay salaries of Hamas's 40,000 public servants in the enclave.
Hamas fatalities on Monday were the highest the group has suffered in an Israeli attack since a Gaza war in late 2012.
(Writing by Maayan Lubell; Editing by Jeffrey Heller and Andrew Heavens)