The men were killed near a border fence separating the densely populated sliver of land from the state of Israel.
The Israeli army said the pair had been shot in an unauthorised zone they had entered near the barrier.
Neither of the men was carrying weapons, but the Israeli army said it had recovered binoculars and mobile phones, items it said suggested they were intending to plan or carry out an attack.
"At early dawn, approximately 6.00am an IDF force deployed along the perimeter fence spotted two Palestinians approaching and moving in a very suspicious manner", said an Israeli army spokesman.
"There is nothing for Palestinians to look for in that area, no agriculture, no villages, and this area has been a hotbed of terrorist activity. Throughout last three years Palestinians have tried to plant explosive devices".
No warning shots were fired, said the spokesman, adding that the pair, aged 25 and 29, were hit first in the legs and then the upper body.
Doctors at al-Shifa hospital where the bodies were taken confirmed bullet wounds to the head, chest and legs
A Red Crescent ambulance driver who transported the dead men said they were staking out the terrain for a planned resistance attack.
The area is close to the Israeli settlement of Nahal Oz, a target of resistance attacks throughout the three-year-old Al-Aqsa Intifada.
He identified the dead as Ashraf al-Imbayid, aged 25, and his 23-year-old cousin Samir.
At their funeral, loudspeakers announced that the pair belonged to Al-Aqsa Martyrs Brigades, an offshoot of Arafat's Fatah movement.
The Palestinian authority website wafa.pna.net said the pair were shot in Gaza's al-Mantar area, east of Shujaiyya.