The Islamist movement Hamas swiftly warned that Israel had "started a war" with its targeted killings. The two militants were killed instantly when an Israeli aircraft fired a missile into their car.
At least 10 civilians were wounded when the vehicle exploded near Jabaliya refugee camp in the northern Gaza Strip, medical sources said. The victims were named as Fayez Abu al-Qaraa, a senior militant commander for the Gaza Strip, and Hassan al-Madhun, commander of an armed wing of Al-Aqsa Martyrs Brigades, which is loosely affiliated to Palestinian leader Mahmud Abbas's Fatah party.
Qaraa, 37, was the first Hamas member killed in Israel's offensive on militants launched after a deadly Palestinian suicide bombing in northern Israel last Wednesday.
His killing provoked a furious response from the main Islamist faction, which has so far largely stayed out of the latest hike in Middle East violence.
"Israel has started a war with this assassination and it will pay a heavy price," a senior Hamas official said, speaking on condition of anonymity.
"You will see, not hear our response. The only language the enemy understands is war," said Hamas's armed wing, the Ezzedine al-Qassam Brigades.
Israel's army said the air force had attacked a vehicle carrying senior Al-Aqsa activist Madhun, whom security sources held responsible for a series of deadly attacks which left 20 Israelis dead.
Israeli sources said Madhum was behind an attack at the Karni checkpoint between Israel and Gaza last January that killed six Israeli soldiers.
In the West Bank, fierce clashes erupted in Jenin as dozens of Israeli tanks, jeeps and bulldozers moved to surround a building where several Islamic Jihad gunmen were holed up, Palestinian security sources and witnesses said.
Jenin has been the scene of some of the fiercest fighting over the five years of the intifada. A total of 54 Palestinians and 23 Israeli soldiers were killed during clashes in the city in April 2002.
Abbas spokesman Nabil Abu Rudeina demanded that the international community intervene immediately to put a stop to Israeli violence, saying the Palestinian Authority and factions were committed to implementing a de facto truce.
The green light should allow for Rafah to function under Egyptian and Palestinian control, with European observers and Israeli camera surveillance.
However, Palestinian ministers denied any final deal had been reached and Israel is still locked in negotiations with the European Union over precisely what kind of presence the 25-nation bloc will adopt at Rafah.
The fate of the terminal has been in limbo since before Israeli ground troops withdrew from Gaza in mid-September.