Three Hamas fighters are reported killed after Israeli aircraft bombed what the military described as a "terror tunnel" in Gaza.
The military said it carried out the strike after five of its soldiers were wounded as they tried to demolish another tunnel used by the Palestinian Islamic militant group Hamas that rules Gaza. That incident drew Israeli fire that killed one Hamas militant.
The latest violence was the deadliest along the volatile boundary since an eight-day Israeli military campaign last November aimed at stopping attacks from Gaza, a coastal strip that borders both Israel and Egypt.
The soldiers were blowing up the infrastructure of a recently discovered tunnel dug in Gaza that stretched into Israel when an explosive device was detonated late on Thursday, wounding the troops and drawing Israeli fire, the military said.
Gaza health ministry spokesman Ashraf al-Kidra said one Palestinian was killed by the Israeli tank fire and Hamas confirmed the man belonged to the militant group.
"During the operation, Hamas detonated an explosive device at the forces, wounding five Israeli soldiers," said a military statement. "The soldiers were evacuated to an Israeli hospital. In an immediate response the soldiers opened fire and directly hit a terrorist."
The military announced last month that it had discovered the concrete-lined, mile-long tunnel dug from Gaza into Israel.
Hamas has dug tunnels into Israel in the past. In 2006, Hamas-allied militants sneaked into Israel through one such tunnel, killed two Israeli soldiers and kidnapped a third, holding him hostage in Gaza for five years.
Hamas spokesman Sami Abu Zuhri "blessed" the latest attacks saying his group "gave a painful lesson" to Israel. "Gaza will be the land of hell" for Israel, he said on Friday.
Israel and Hamas are bitter enemies. Hamas does not recogniSe Israel's right to exist, and since it took power in the Gaza Strip, thousands of rockets have been fired at Israeli communities.
Israel carried out major military operations in 2009 and last year in Gaza in response to the rocket fire.
Since the summer, Egypt's military has tried to destroy or seal off most of the smuggling tunnels under its side of the border with Gaza, and accused Hamas of fomenting unrest in Egypt.
The move followed the popularly-backed coup that ousted Egypt's President Mohammed Morsi, from the Islamist Muslim Brotherhood group, a parent organisation of Hamas.