Israeli Prime Minister Benjamin Netanyahu said the ceasefire in Gaza would end and the military would resume fighting Hamas until it was defeated if the Palestinian group did not release hostages by midday Saturday.
Following Netanyahu's ultimatum, Hamas issued a statement renewing its commitment to the ceasefire and accusing Israel of jeopardising the ceasefire.
The Israeli announcement came after Netanyahu met with several key ministers, including defence, foreign affairs and national security, who he said gave the ultimatum their full support.
After nearly 16 months of war, Hamas has gradually been releasing hostages since the first phase of a ceasefire began on January 19, but on Monday said it would not free any more until further notice over accusations Israel was violating the deal.
"If Hamas does not return our hostages by Saturday noon - the ceasefire will end and the IDF (military) will return to intense fighting until Hamas is finally defeated," Netanyahu said.
It was not immediately clear if Netanyahu meant Hamas should release all hostages held in Gaza or just the three who had been expected to be released on Saturday under the ceasefire.
US President Donald Trump, a close ally of Israel, has said that Hamas should release all of the hostages by Saturday.
The prime minister also said he had ordered the military to gather forces inside and around Gaza, with the military announcing shortly after it was deploying additional forces to Israel's south including the mobilisation of reservists.
A Hamas official earlier said that Israeli hostages could only be brought home if the ceasefire was respected, dismissing the "language of threats" after Trump said he would "let hell break out" if they were not freed.
"Trump must remember there is an agreement that must be respected by both parties, and this is the only way to bring back the (Israeli) prisoners," senior Hamas official Sami Abu Zuhri told Reuters.
Hamas has said Israel has violated the ceasefire with several deadly shootings as well as by holding up some aid deliveries and impeding the return of Gazans to the strip's north.
Israel denies holding back aid and says it has fired on people who disregarded warnings not to approach Israeli troops.
So far, 16 of 33 hostages have been freed as part of the ceasefire deal's first phase due to last 42 days. Five Thai hostages were also let go in an unscheduled release.
In exchange, Israel has released hundreds of Palestinian prisoners and detainees, including prisoners serving life sentences for deadly attacks and others detained during the war and held without charge.
An Israeli group representing families of hostages urged Netanyahu to stick to the ceasefire agreement.
"We must not go backwards. We cannot allow the hostages to waste away in captivity," the hostages forum said.
There are 76 hostages still held in Gaza, more than 35 of them believed to be dead, according to Israeli media.
More than 48,000 Palestinians have been killed in the war, the Gaza health ministry says, and nearly all of Gaza's pre-war population of 2.3 million has been internally displaced by the conflict.
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