Rafah hospital chief Dr Ali Musa said Walid Abd al-Wahid died after being hit in the chest by a bullet during the Thursday morning invasion.
The 30-year-old's body was recovered from the scene and taken to the hospital. Seven other people were also injured, including two 12-year-old boys who were said to be in a serious condition.
Sameer Abu Shammala, Aljazeera’s correspondent in Palestine, said: “A huge number of Israeli armoured vehicles, backed by Apache helicopters, raided the al-Brazil area in Rafah late on Wednesday.
“The Apaches opened fire randomly at many Palestinian citizens’ houses."
He added: “Israeli soldiers launched search operations into many houses in the area, and occupied high buildings, keeping their residents in closed rooms... Israeli snipers shot any bystanders they saw.”
The correspondent also said Israeli soldiers demolished a Palestinian house in the area, claiming they were looking for tunnels used by Palestinians to smuggle arms from Egypt into the Gaza Strip.
“The people of the area have appealed to the international community for its immediate intervention to end the Israeli aggression against Rafah,” he said.
However, an Israeli military source said that troops opened fire on a group of four Palestinians who were in breach of a curfew, but did not know if anyone had been killed.
"IDF forces earlier this morning identified four armed Palestinians outside who were approaching our forces," he said.
The US convoy attack killed three
American security guards
"We opened fire and we identified a hit on one of them. We do not know if he was killed, but we know for a fact that he was hit and that he was armed."
The Israeli army has recently conducted a military operation in Rafah, which it says is designed to destroy tunnels used to smuggle weapons under the border with Egypt.
United Nations officials have said more than 1240 Palestinians have been made homeless as a result of the operation, which has killed eight Palestinians and injured 80 more.
Meanwhile, Palestinian security services have arrested four men in a refugee camp in the northern Gaza Strip, following a deadly bomb attack on a US diplomatic convoy.
At least three of those arrested in the Jabiliya refugee camp, which is about two kilometres from the scene of the blast on Wednesday, were members of the Popular Resistance Committees, sources said.
The fringe group initially claimed responsibility for the blast in an anonymous phone call to AFP, but later issued a statement denying involvement.
According to some witnesses, there was an exchange of fire between security services and residents in the camp as the arrests took place.
Palestinian security to work with FBI
Yasir Arafat said on Thursday that Palestinian investigators would work with an FBI team to help find the perpetrators of a bomb attack.
"We have sent our brothers from the security council to investigate in the painful incident which was not only against our American friends but against the Palestinian people," the Palestinian leader told reporters.
"They are cooperating with the American expertise committee."
Arafat has tasked the head of general security in Gaza, General Abd al-Raziq Mujaida, to form an investigation commitee which will work with the FBI team.
Sources close to Mujaida told AFP that the general would meet the American team either late on Thursday or on Friday morning.
A US embassy spokesman had earlier confirmed that the team had arrived in Israel and had begun their investigation.
Asked if there had been any progress in the inquiry, Arafat said: "We are still investigating and working."
US President George Bush, on Wednesday said the bomb attack, which left three American security personnel dead, was evidence of a failure by Palestinian authorities to crack down on resistance fighters.
"Palestinian authorities should have acted long ago to fight terror in all its forms," said Bush.
Bush said Palestinian leader Yasir Arafat was blocking needed reforms, such as handing real power to the Palestinian prime minister and empowering that office to control all Palestinian security forces.
"The failure to undertake these reforms and dismantle the terrorist organizations constitutes the greatest obstacle to achieving the Palestinian people's dream of statehood," he said.