Eyewitnesses said Israeli aircraft launched two rockets at a militant group in the east of the city of Khan Yunis. Another two militants were slightly wounded.
The dead militants were reportedly members of the Izz el-Deen al-Qassam brigades, a militant wing of hard-line Islamist group Hamas, which controls the Palestinian enclave.
Local radio stations reported that Israeli troops supported by tanks and armored vehicles had entered the eastern part of the Al-Bureij refugee camp in Gaza this morning and were involved in heavy fighting with Palestinian militants.
Israeli Prime Minister Ehud Olmert pledged on Thursday to deal a devastating blow to Hamas in response to the killing of two Israeli civilians at a fuel depot near the Nahal Oz border crossing Wednesday. In a retaliatory measure, involving tanks and helicopters, Israeli troops killed at least seven Palestinians.
Islamic Jihad and the Popular Resistance Committees claimed responsibility for the attack.
Speaking at a ruling Kadima party meeting Olmert said Hamas was to blame for any attacks from Gaza regardless of the perpetrators.
"We don't care which terrorist is a member of which organization," Israeli media quoted the prime minister as saying. "Hamas is the one running the show in Gaza these days."
"I promise you that the response to Hamas would be such that Hamas will be unable to continue operating against Israel's citizens," Olmert said.
Gaza, home to 1.5 million Palestinians receives most of its fuel supply through the Nahal Oz crossing, and the terminal was closed after the attack. But Israeli authorities said deliveries will resume to prevent a humanitarian crisis in Gaza.
Alongside fighting terrorists, Olmert pledged that peace talks with the Palestinian National Authority in the West Bank will continue.