Israeli troops shot and killed two Palestinian gunmen armed with rifles and rocket propelled grenades as they approached a checkpoint on the boundary between Israel and the Gaza Strip.
The bloodshed came as Israeli Prime Minister Ariel Sharon fought rivals in his cabinet in a battle to push through his Gaza pullout plan.
Palestinian security sources said they had been informed by the Israeli army that two Palestinians were killed near the Karni checkpoint.
The Palestinian militant group Hamas said the men, from the Jabalya refugee camp, were on their way to carry out an attack on an Israeli convoy.
The Israeli army also launched a fresh pre-dawn incursion into the Rafah refugee camp, demolishing three homes just over a week after Israel killed 42 Palestinians in the bloodiest Israeli raid in Gaza in years, residents said.
The army said it found a tunnel in Rafah used to smuggle arms across the border from Egypt, one of 15 it says it discovered this year.
Violence flared in Gaza after Mr Sharon declared in February his intention to evacuate the seaside strip's 21 Jewish settlements along with four others in the West Bank.
The United Nations said two Palestinian boys were wounded by the Israeli army yesterday, one seriously, after a tank fired its machine-gun at a UN elementary school in Rafah's Tel Sultan area.
"This is the second time in a little over a year that a child in a UN classroom has been struck by Israeli fire," said Peter Hansen, head of the United Nations Relief and Works Agency for Palestinian refugees (UNRWA).
"Such indifference to the sanctity of schools and the UN flags flying above them violates all humanitarian norms and is absolutely deplorable," he said in a statement, adding that several shots had hit the school building. The army said it was checking the report.
Israel came under intense international criticism for its actions in Rafah during its six-day raid last month, which the army said was aimed at finding and destroying arms-smuggling tunnels dug under homes.
Palestinians called the raid retaliation for a string of ambushes by militants that killed 13 soldiers earlier in May.