The missile destroyed Mahmud al-Zahhar’s home in Gaza City, killing his son Khalid and bodyguard, Shuhda al-Duhairi.
The third victim was too disfigured as to be identified immediately, according to Aljazeera’s correspondent on Wednesday.
Thirty Palestinian civilians were injured in the city’s Rimal neighbourhood when the missile damaged adjacent homes as well.
Al-Zahhar himself was in a garden beside the house at the time, taking slight wounds in the head and back. He was taken to nearby al-Shifa Hospital, according to Hamas.
His wife and daughter, however, are in a critical condition. The bodies of the three dead were badly burned.
"Killing the Palestinians and escalating the violence will not help Israel achieve its security"
Palestinian Prime Minister
Israeli military sources confirmed that al-Zahhar was the target of the raid.
A government statement offered a justification for the missile attack in a residential area.
"The Hamas leadership in the Gaza Strip functions as the general military wing for the entire terror organization and is the highest level at which the perpetrating of terror attacks is approved," the statement said.
But the Palestinian Authority condemned the attack.
Palestinian Authority reaction
"Killing the Palestinians and escalating the violence will not help Israel achieve its security," Prime Minister Ahmad Quraya said at his home near east Jerusalem.
Mahmud al-Zahhar escaped death,
his son was not so lucky
"They need to treat Palestinians with respect and sit and talk with them to find a solution."
Palestinian cabinet minister Yasir Abd Rabu told reporters in Ram Allah: "We condemn this crime. It will only lead to fuelling the cycle of violence."
Staff at the hospital called over loudspeakers for people to donate blood to help treat the wounded, who were brought to the hospital in ambulances and private cars.
The military wind of Hamas, Izz al-Din al-Qassam Brigades, denounced the attack and implied a violent response.
In a statement released hours after the Israeli missile attack, the Brigades said: "The targetting of civilian houses is a violation of all red lines. The Zionist enemy will have to shoulder responsibility for the targetting by us of houses and zionist buildings everywhere in occupied Palestine."
The airstrike came a day after bombers killed 15 Israelis in twin attacks at a bus stop crowded with soldiers and at a popular Jerusalem nightspot.
Hamas has stopped short of claiming responsibility for Tuesday's bombings.
But the movement has threatened unprecedented retribution for Israel's failed attempt over the weekend to kill several Hamas leaders, including founder Shaikh Ahmad Yasin, in an air strike.