Around 3000 Palestinians were demonstrating in support of Palestinian President Yasir Arafat on Sunday in the town of Dair al-Balah.
About 100 youths took the rally closer to the nearby Jewish settlement of Kfar Darum, where they began throwing stones at occupation soldiers manning checkpoints.
An Israeli military source confirmed that troops had opened fire at the “main inciters”. Occupation soldiers also fired teargas, he said.
Elsewhere, Israeli troops closed the Karni industrial border crossing just south of Gaza City, said Palestinian and Israeli sources.
The crossing allows the vital passage of goods in and out of Gaza. Palestinian workers employed on the Israeli section of the terminal were sent back into Gaza.
Israeli troops then opened fire in the direction of a Palestinian area close to the border terminal.
The Israeli army and port authority claimed the crossing had been closed for security reasons.
Israel regularly imposes blanket closures on civilian Palestinian areas. The international community and human rights groups condemn the policy as collective punishment.