A previously agreed three-day truce was set to expire less than an hour afterwards, at midnight local time (2100 GMT).
"We have agreed to give more time for the negotiations," Azzam al-Ahmed, head of the Palestinian delegation in Cairo said on Wednesday, saying the extra time would be a further five days.
An Egyptian official said Israel also accepted the proposal. Israel had earlier said it would back an extension of the lull.
Earlier on Wednesday, Israel claimed that a rocket from Gaza had landed in southern occupied territories, hours before the truce was supposed to come to an end, Reuters reported.
However, Hamas denied it was responsible for firing the rocket.
Israel responded, targeting sites across the Gaza Strip. It was not clear if the fighting was isolated or might shatter the truce, Al Jazeera reported.
The ceasefire extension is meant to grant both sides additional time to negotiate a longer-term truce and a roadmap for the coastal territory.
Israeli and Palestinian negotiators were considering an Egyptian proposal that partially addresses their demands, but deep differences have kept the deal in doubt.
A month of war has killed over 1,900 Palestinians and 67 Israelis while devastating wide tracts of densely populated Gaza.
Gaza hospital officials say the Palestinian death toll has been mainly civilian since the July 8 launch of Israel's military campaign against Gaza strip.
Israel has lost 64 soldiers and three civilians, while heavy losses among civilians and the destruction of thousands of homes in Gaza have drawn international condemnation.