The Defence Ministry published a request for bids 11 days after the cabinet approved in principle a Gaza pullout, under which Israel would keep a narrow corridor on the Egyptian frontier pending possible security arrangements with Cairo.
"This is the beginning of turning the Gaza Strip into a big prison," Palestinian cabinet minister Saib Uraiqat said.
Inviting bids by 12 July, the ministry said the southern Gaza Strip "canal" would be 15 to 25 metres deep, about 120 metres wide and stretch four km.
It will run the length of the Philadelphia Road - the name given to the border corridor with Egypt - from the Mediterranean Sea to a Jewish settlement called Kerem Shalom.
At its proposed length, the moat would leave the remaining eight km of the Gaza-Egypt border untouched. But Palestinians accused Israel of isolating the impoverished coastal strip.
The water-filled moat or canal would be in addition to an eight metre high wall blocking Rafah from the ''frontier buffer zone'' and a vast barrier in the West Bank condemned by Palestinians as a new "Berlin Wall".
In addition to carving a deep moat through the area and flood it, Israel has decided to level rows of buildings abutting the zone, now about 200 metres wide.
Israel has bulldozed homes in order to create a no-man’s land or buffer zone between the southern border of Gaza, outside Rafah, and Egypt, that Israel would continue to control after withdrawing from other parts of Gaza.
''It is impossible to believe that every one of these houses shelters 'militants' or the entrance to a tunnel''
Armed Israeli forces chief Moshe Yaalon said "hundreds of houses [in Rafah] are marked for demolition’’. This move has brought condemnation from across the globe including the US and EU.
Israeli officials said the goal in Rafah was to widen the strip to put patrols out of range of Palestinians allegedly firing from the cover of houses and to stop the digging of tunnels.
Yaalon’s threat means thousands more Palestinians in the sprawling, densely populated camp of 80,000 people face homelessness. At least 200 homes have recently vacated.
More than a thousand people have been made homeless in the past week as Israel creates what Defence Minister Shaoul Mofaz has called a ''new reality''.
Yaalon told cabinet that since the Supreme Court’s ruling on Sunday 16 May that the army has the right to demolish homes near the Egyptian border as a ''defensive measure'', the army would continue widening the buffer zone from 200 metres to 250 metres.
On 17 May army bulldozers dug up the road out of the Salah al-Din area, in a district of the Rafah refugee camp preventing distraught Palestinians whose homes were slated for destruction from leaving with their belongings.
Israel says demolishing homes
is a justified 'defence measure'
Paul McCann, a spokesman for the United Nations Relief and Works Agency (UNRWA), said that in the space of 48 hours in the al-Zaitun area 15 people had been killed and 226 injured.
Sixteen families had been made homeless and a further 32 families had their homes damaged.
''It is impossible to believe that every one of these houses shelters 'militants' or the entrance to a tunnel,'' McCann said.