CAIRO, May. 9 (Reuters) - Israeli forces bombarded areas of Rafah on Thursday, Palestinian residents said, as Prime Minister Benjamin Netanyahu dismissed U.S. President Joe Biden's threat to withhold weapons from Israel if it assaults the southern Gaza city.

A senior Israeli official said late on Thursday that the latest round of indirect negotiations in Cairo to halt hostilities in Gaza had ended and Israel would proceed with its operation in Rafah and other parts of the Gaza Strip as planned.

Israel has submitted to mediators its reservations about a Hamas proposal for a hostage release deal, the official said.

"If we must, we shall fight with our fingernails," Netanyahu said in a video statement. "But we have much more than our fingernails."

In Gaza, Palestinian militant groups Hamas and Islamic Jihad said their fighters fired anti-tank rockets and mortars at Israeli tanks massed on the eastern outskirts of the city.

Residents and medics in Rafah, the biggest urban area in Gaza not yet overrun by Israeli ground forces, said an Israeli attack near a mosque killed at least three people and wounded others in the eastern Brazil neighbourhood.

Video footage from the scene showed the minaret lying in the rubble and two bodies wrapped in blankets.

An Israeli air strike on two houses in the Sabra neighbourhood of Rafah killed at least 12 people including women and children.

Among the dead was a senior commander of the militant Al-Mujahedeen Brigades, and his family, and the family of another group leader, medics, relatives and the group said.

Israel says Hamas militants are hiding in Rafah, where the population has been swelled by hundreds of thousands of Gazans seeking refuge from the bombardments that have reduced most of the coastal enclave to ruins.

In the United States, the White House repeated its hope that Israel would not launch a full operation in Rafah, saying it did not believe that would advance Israel's aim of defeating Hamas.

"Smashing into Rafah, in [President Biden's] view, will not advance that objective," spokesperson John Kirby said.

Kirby said Hamas had been pressured significantly by Israel and there were better options to hunt down what remains of the group's leadership than an operation with significant risk to civilians.

Israel's assault on Gaza has killed nearly 35,000 Palestinians and wounded nearly 80,000, most of them civilians, the health ministry in Hamas-run Gaza said.

It launched its offensive in response to a cross-border attack by Hamas militants on Israel on Oct. 7 in which they killed about 1,200 people and abducted 252. Some 128 hostages remain in Gaza and 36 have been declared dead, according to the latest Israeli figures.

Biden on Wednesday issued his starkest warning yet against a full ground invasion in Rafah, telling CNN that: "I made it clear that if they go into Rafah...I'm not supplying the weapons."

Israel's ambassador to the United States said the decision to withhold weapons from Israel over Rafah sends the "wrong message" to Hamas and the country's foes.

"It puts us in a corner because we have to deal with Rafah one way or the other," Ambassador Michael Herzog told a Carnegie Endowment for International Peace webinar.

The Israeli military has the munitions it requires for operations in Rafah and other planned operations, chief armed forces spokesperson Rear Admiral Daniel Hagari said.

Israeli armed forces have already killed 50 Palestinian gunmen in east Rafah and uncovered several tunnels, Hagari said. Hamas had no immediate comment.

Photo from Reuters