A rocket fired from Egypt's Sinai Peninsula slammed into the Israeli Red Sea resort of Eilat on Thursday, police said, causing no injuries in the town packed with tourists ahead of a Jewish holiday.
The attack prompted Prime Minister Benjamin Netanyahu to warn that Israel would "hit those who hit us."
Eilat police were put on the highest state of alert following the blast, officials said.
"This rocket, which was fired from Egypt, exploded in the town but did not cause any injuries or damage," Eilat district police chief Ron Gertner told army radio.
Gertner said a Grad rocket hit a construction site in the city, about 300 metres (yards) from a residential area, shortly after midnight (2100 GMT on Wednesday).
In all, three loud blasts rocked the city, prompting hundreds of people to ring the emergency police number.
"Eilat residents heard three explosions in the night, but for the moment we have only found one rocket," police spokesman Micky Rosenfeld told AFP. Police were conducting searches to see if anything else had hit the town.
The army confirmed details of the incident.
"This rocket exploded in the town but there were no victims or damage," a military spokeswoman said.
The blast occurred as thousands of Israeli and foreign tourists descended on the resort to celebrate the week-long Jewish holiday of Passover, which begins at sundown on Friday.
Eilat resident Yossi Atia told the website of the Haaretz daily he heard a blast and went out to look for what caused it, finding traces of the rocket just 150 metres (yards) from his home.
"I went out and looked for traces of the rocket. I searched for 40 minutes with torches until I found (them)," he told the website.
Yitzhak Halevy, mayor of Eilat, told army radio he had been holding talks with the security establishment about the deployment of a battery of the anti-rocket defence system, Iron Dome, which has proven effective at protecting residents of southern Israel from rockets fired from the Gaza Strip.
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He also said there had been no indication that people were leaving Eilat in the wake of the incident, and police confirmed they had not issued any special instructions or alerts to residents or tourists.
In Egypt, officials said publicly that the attack was not staged from Sinai.
Mahmud al-Hifnawy, south Sinai's security chief, told AFP there had been no attack from Egyptian territory, adding "the situation is completely secured."
And South Sinai governor Khaled Fouda said: "Israel has become accustomed to spreading such rumours, to harm tourism."
But privately, security officials said they were investigating and combing the border area.
Netanyahu, speaking at a public ceremony, warned that the Jewish state would respond to attacks.
"We have long seen that half the Sinai Peninsula has become a base for launching rockets at Israel," he said.
"We are now building an impressive security fence, but it won't stop the rocket. We will find solutions and we will hit those who hit us, as well as those who sent them."
Israel's chief of military intelligence Aviv Kochavi said that rocket attacks on Eilat were "an expression of the fundamental change sweeping over the region (of Sinai). The terror groups continue to base themselves there and strengthen their hold."
According to Kochavi, whose comments to intelligence officers were carried by military radio, in the past two months "over ten terror infrastructures in Sinai were exposed and the attacks they planned were thwarted."
It was the first rocket attack since the collapse of the regime of Egyptian president Hosni Mubarak in February 2011. Since he was toppled, a wave of unrest has swept the restive Sinai Peninsula which borders on Israel.
In August 2011, a group of gunmen from the Sinai sneaked across the border and carried out a series of deadly ambushes just north of Eilat, killing eight Israelis.
In the ensuing search for the gunmen, Israeli troops shot dead six Egyptian police officers along the border, sparking a diplomatic crisis between the two countries.
A year earlier, several rockets fired from the Sinai, which were apparently aimed at Eilat, slammed into the nearby Jordanian port of Aqaba, killing one person and wounding five others.