Hundreds of Palestinians have crossed into Egypt after militants stole two bulldozers and, in a show of force against the Palestinian Authority, smashed through the wall separating Gaza and Egypt.
The militants breached the wall hours after they blocked the official border crossing and took over government buildings.
As many as 300 Palestinians then crossed into Egypt, an Egyptian security official said.
Israel has asked Egypt to arrest Palestinians who cross from Gaza through the breach.
An Egyptian armored vehicle was set on fire and two Egyptian soldiers are reported to have been killed during clashes.
At least three Palestinians were reportedly injured, one seriously when an Egyptian troop carrier crushed him against a wall, witnesses said.
The militants belong to the Al Aqsa Martyrs' Brigades, an offshoot of Palestinian leader Mahmoud Abbas' Fatah Party.
The militants' rampage through the southern Gaza town of Rafah underscored the growing lawlessness in Palestinian towns, especially in Gaza. Abbas, who has condemned the chaos, has been unable to impose order, and his failure to keep the gunmen in check is expected to harm Fatah's prospects in Jan. 25 parliamentary elections.
Fatah-affiliated vigilantes demanding government jobs or the release of imprisoned friends have been responsible for much of the anarchy, particularly since Israel's pullout from Gaza in September.
The tightly run Islamic militant group Hamas, whose followers have rarely been involved in vigilante violence, is expected to do well in the vote against the corruption-tainted Fatah.
Agencies