The soldier's purported capture Friday had helped shatter an internationally brokered cease-fire, drawn global condemnation and triggered a military assault on the area of his disappearance in southern Gaza that left dozens of Palestinians dead and scores of homes destroyed.
The military did not explain how it reached the conclusion that Hadar Goldin, a 23-year-old infantry lieutenant, was killed in battle Friday.
The announcement of his death came amid signs that Israel is scaling back its 27-day-old ground operation in Gaza.
In a televised address late Saturday, Israeli Prime Minister Benjamin Netanyahu suggested troops would reassess the operation after completing the demolition of Hamas military tunnels under the Gaza-Israel border. Security officials said the tunnel mission was winding down.
At the same time, Netanyahu warned that Hamas would pay an "intolerable price" if it continued to fire rockets at Israel and that all options remain on the table.
Hamas said it would not halt its fire if Israel withdraws unilaterally.
"We will continue to resist until we achieve our goals," Hamas spokesman Fawzi Barhoum said after Netanyahu's speech, dismissing the Israeli leader's remarks as "confused."
Hamas has said it will not halt hostilities until Israel and Egypt lift their blockade of Gaza, imposed after Hamas overran the territory in 2007.
Egypt was to have hosted indirect talks between Israel and Hamas on a sustainable cease-fire, including new border arrangements for Gaza. The talks were to begin as an internationally brokered three-day truce took hold, starting Friday.
Instead, the arrangement broke down over Goldin's purported capture and the ensuing violence, and Israel said it won't attend such talks, at least for the time being.
Cabinet minister Yuval Steinitz said Saturday that Israel won't send a delegation to Cairo for now, alleging Hamas has repeatedly broken cease-fire arrangements and that there was "no point" negotiating with the Islamic militant group.
From an Israeli perspective, the advantage of a unilateral pullout or troop redeployment to the strip's fringes is that it can do so on its own terms, rather than becoming entangled in negotiations with Hamas.
However, a unilateral pullback does not address the underlying causes of cross-border tensions and carries the risk of a new flare-up of violence in the future, a prospect underlined by defiant Hamas messages Saturday.
Israel ended a previous major military operation in Gaza more than five years ago with a unilateral pullback.
At least 1,721 Palestinians have been killed and more than 9,100 wounded - the majority civilians- since the Gaza war began July 8, said health official Ashraf al-Kidra. Israel has lost 67 people, most of them soldiers.
Large swaths of Gaza have been destroyed and some 250,000 people have been forced to flee their homes.
In the area around the southern town of Rafah, where Goldin purportedly had gone missing, the extent of destruction became apparent after two days of intense Israeli shelling that left dozens dead and more than 450 wounded.
Entire apartment buildings were flattened. Rescue teams sprayed water on charred rubble as families searched the wreckage for any salvageable belongings.
Nearly two dozen bodies wrapped in bloodstained white cloth lay piled on the ground and on the shelves of a cold storage room in a flower farm. The farm's owner, Ghazi Hijazi, said the Health Ministry asked him to keep the bodies.
Imad Baroud, his wife and three kids fled by foot from their home near the Gaza-Egypt border to his parents' home in the center of Rafah to escape the shelling. He said his home was hit by artillery shells immediately after they left.
"The situation could not be described in words. The kids were yelling, they were scared, my wife was scared. I felt death was close," Baroud said.
Much of Israel has been exposed to close to 3,000 rocket attacks from Gaza which have killed three civilians and damaged several homes.
Israel has said a key goal of its Gaza operation is the demolition of tunnels Hamas has dug into Israel.
The military has said they are a strategic threat because Hamas has previously launched attacks from there. Several soldiers have been killed in the current round of fighting by Palestinian gunmen who popped out of tunnels near Israeli communities along the Gaza border.
On Saturday, Netanyahu suggested the military will reassess after the tunnels are demolished. Once that is done, "the military will prepare for continuing action in according to our security needs," he said, adding that all options remain on the table.
"We promised to return the quiet to Israel, and that is what we will do. We will continue to act until that goal is reached, however long it will take and with as much force needed," Netanyahu said. "Hamas needs to understand that it will pay an intolerable price as far as it is concerned for continuing to fire."
Early Sunday, before Goldin's death was announced, the Israeli defense minister and the chief military rabbi met with the soldier's family at their home in the central Israeli town of Kfar Saba.
Hundreds of people had gathered outside the home, praying and showing their support. There was an outpouring of grief when the military's announcement was made public.
"Prior to the decision, all medical considerations, religious observances, as well as additional relevant issues were taken into consideration," the military said.
In the past, Israel has gone to great lengths to get back captured soldiers. In 2011, it traded over a thousand Palestinian prisoners for a soldier who had been captured by Hamas-allied militants in 2006.
On Saturday, there were some signs of troop redeployment in Gaza.
The Israeli military told residents of the northern Gaza town of Beit Lahiya that it would be safe for them to return to their homes.
The area, from which Gaza militants had fired rockets at Israel in the past, came under heavy tank fire during Israel's ground operation, forcing thousands to flee.
Israeli troops and tanks also started a gradual pullback from the area east of the Gaza town of Khan Younis to the border with Israel, residents and police officials there said.
At the same time, Palestinian officials reported more than 150 Israeli airstrikes across Gaza, including several against mosques and one against the Hamas-linked Islamic University in Gaza City. Heavy shelling also continued along the border areas.
The Israeli military said it struck dozens of targets. It said this included five mosques that concealed weapons and that the Islamic University was being used as a research and weapons manufacturing site for Hamas. The claims could not be independently verified.
Gaza militants, meanwhile, fired about 90 rockets at Israel since midnight Saturday, according to the Israeli military. Seven were intercepted by Israel's rocket defense system, it said, while a mortar attack seriously injured a 70-year-old Israeli civilian.
Laub reported from Gaza City, Gaza Strip. Associated Press writers Hamza Hendawi and Yousur Alhelou in Jerusalem contributed to this report.