* Gazans fear stepped-up bombings, Hamas says ready to fight
* Around 30,000 flee while others say nowhere is safe
By Noah Browning
GAZA, July 18 (Reuters) - Gaza's Palestinians hunkered down in fear for their lives while Hamas militants urged defiance after Israel sent forces into the densely populated territory on Thursday after 10 days of cross-border fire.
Residents largely abandoned the usually teeming streets after a fevered night of bombardment. Ships spitting machinegun fire drifted closer to the desert enclave's Mediterranean shore, artillery shells lit the skyline orange every few seconds and buildings shook from the air attacks.
Small groups of drowsy men trudged to Friday prayers in Gaza City despite the frequent boom of Israeli artillery.
"We're terrified. My whole family hears the bombs fall around us and we could be hit any time. We feel like there's nothing we can do to protect ourselves," said Yousef al-Hayek, 60, wearing a white robe and clasping prayer beads.
"Everything's in God's hands. The invasion was expected, but how it will end is not yet clear. We hope for a truce."
Among the 23 Palestinians killed in the night darkness after Israeli announced ground operations to destroy underground tunnels used by militants were three young cousins - Mohammed, Mohammed and Ali Nutaiz, aged between 4 and 26.
They fled with their families from Israeli tank fire in an eastern border town, only to be killed when the house to which they fled was shelled, a relative told Reuters at their funeral.
Palestinian medics say 222 of the 260 Gazans killed in the hostilities have been civilians, including 40 children.
Hamas said it welcomed Israel's ground thrust and looked forward to killing and capturing soldiers after many of its some 1,400 rockets - according to the Israeli military - so far were deflected by missile defences. Just one Israeli civilian has been killed, as well as one soldier in the incursion.
"Are you promising us what we are waiting for? Gaza is waiting for you to suffer bitter death," Abu Ubeida, the masked and camouflaged spokesman of Hamas's armed wing, the al-Qassam brigades, boasted last week.
"The world will see the skulls of your soldiers stepped on by the bare feet of our children. We will turn it into the promised hope of freedom dawning soon for our prisoners," he said, referring to the militants' hope of abducting Israeli troops and exchanging them for Palestinian prisoners.
ISRAELI WARNINGS, HACKINGS
Israel says it takes pains to avoid civilian casualties and targets only the militants and their weapons, but that this is not easy to do because it says rocket crews use residential areas for cover against an enemy with far superior firepower.
Prime Minister Benjamin Netanyahu said on Friday: "The Israeli Defence Force is a uniquely moral army and doesn't aspire to hurt even a single innocent person. Not even one. We act only against terror targets, and regret any harm, in error, done to civilians."
The Israeli military has warned Palestinians of impending strikes by telephoning residents of targeted houses, dropping disabled warning bombs on their roofs and strewing leaflets across endangered neighbourhoods.
It has repeatedly hacked Hamas's al-Aqsa TV channel to broadcast the warnings, but the areas so far mentioned are home to several hundred thousand people. While around 30,000 have fled to temporary U.N. shelters, many insist they will stay put.
"It's impossible for everybody from my area to flee. Where would they all go?" said Faris Aryan, a shopkeeper from the northern border town of Beit Lahiya.
"The shells were landing almost every second. I just go from the shop back home. We don't know what is going on or what to expect. We fear things could get much worse."
While its leaders have gone into hiding and its fighters disappear into shadowy warrens on the front lines, Hamas's media called for courage and tried to gird Gazans for a long fight.
"This urban war, which the heroes of al-Qassam are directing..., is going on above and below the ground, and they've achieved great successes and the enemy has taken heavy losses!" an announcer on Hamas's al-Aqsa radio intoned proudly.
"The people must realize all this, despite how they try to frustrate our morale and the psychological war this cowardly enemy is practicing."
(Editing by Mark Heinrich)