That is what the Israelis are doing, going to the town where the rockets were fired from and punishing the entire town. The reason is the Israelis can NOT determine who launched the rocket (or if the launchers were even from that town). This is like someone getting mug by your home and the victims relatives going to YOUR HOME to punish you for not stopping it (Cut off your heat and electricity for the crime, even through it is clear you had nothing to do with it). Such collective punishment violate International law. Especially if aimed at the Civilian population.
This is the problem, Israel wants Hamas to do something about these Rocket attacks. Abbas has no real authority in Gaza, thus what he says does not matter. Furthermore Hamas WON control of Gaza in a free and fair election the result of which was opposed by Abbas who tried to undo the election results and was driven out for his efforts.
As to loses, the Palestinians have suffer WAY more loses than the Israelis (8 Israelis killed vs 123 Palestinians). What would you do if 123 of your neighbors were Killed? You re willing to drive a tank into Gaza for 8 dead, what would you do for 123 dead? Thus almost 94% of all deaths have been Palestinians.
http://en.wikipedia.org/wiki/2007_Israel-Gaza_conflictFor more on the Abbas _hamas fight:
http://en.wikipedia.org/wiki/Palestinian_factional_violenceI am sorry given the conditions in Gaza, the best solution for the Israelis is to accept the losses. Sooner or later Hamas will accept the Rockets are NOT doing any good and stop launching them. This may take a few years and the end will be one day the Rocket launcher will just lock they production facilities and never return. That is how such conflicts end, both sides accept the other (Notice I use the word "accept" not tolerate or agree with each other) and learn to live side by side. As long as the Israelis endure the rockets and ignore them, the effect will be minor. Hamas can NOT launch any serious form of attack on Israel and israel knows this. Israel can NOT occupy Gaza, to many Palestinians which require to many Israeli Troops. If the Israeli can catch the launchers that is good and effective, but if the launcher just move on retaliating against the launching sights is worse than useless for you have to destroy things that the launching of the small rockets did not even touch. You in prove WHY Hamas should be shooting the rockets. Ignore them and it will either die way OR the launchers will get sloppy and you can capture them. Either way you solve the problem after a few years.
As to the isolation of Gaza, you have in effect used your trump card AND HAMAS CALLED IT WHEN IT BLEW OPEN THE WALL TO EGYPT. Egypt has closed the wall but for how long? Egypt has its own radical Moslem movement which support Hamas (The Moslem Brotherhood). The closing of the wall strengthened the Moslem brotherhood for it shows the Egyptian people (Who tend to support the Palestinians) that the Government is supporting Israel NOT the Palestinians.
AS a hold the Israelis are in a tough situation, which can blow up in their face if it causes Egypt to turn radical. The better solution would be to keep the electricity to Gaza on, keep the border open and try to find where the rockets are being made and destroy the plant. Take the heat and slowly permit the Palestinians to improve their standard of living. Once it starts to improve, support for Hamas continuing the rocket attacks will die off. This may take 4-5 years but you can NOT leave a group of people fester on your border with no hope of ever seeing an improvement in their lives. That is the situation in Gaza, and will continue till Israel accepts that situation is unacceptable and do something about it.