The occupation force aircraft fired at least two missiles into a building in the city's Zaitun neighbourhood that residents said was the home of a member of the resistance organisation Hamas.
Hamas is opposed to the Israeli occupation of Palestinian land.
The apparent target of the attack, Abu Malik Jindiyah, escaped unhurt, but four bystanders were wounded, medics said.
The explosions tore apart the building and sent up a column of thick, black smoke.
Hiba Akila, Aljazeera's correspondent in Palestine, said a car was also burned and destroyed in the attack.
Palestinians, in response, later fired a missile into a Jewish settlement in the Gaza Strip, wounding four people at a community centre, the Israeli army claimed.
Israeli military sources said they believed a rocket hit the building at Neveh Dekalim, at the Gush Katif settlement bloc.
Emergency services said three were lightly injured while one of the casualties was in a more serious condition.
Civil war speculation
Following the helicopter attack, Israel's army made no comment, but an Israeli security source said: "They were looking for Hamas activists."
Israeli helicopter gunships have often targeted Palestinian resistance fighters including the assassination of the spiritual leader of Hamas, Shaikh Ahmad Yasin and Abd Al-Aziz al-Rantisi.
The Israeli missiles tore the
In addition to the regular Israeli attacks, Gaza has been touched by unprecedented internal unrest over the past week that has stirred fears of a Palestinian civil war.
A power struggle, triggered by an Israeli plan to abandon occupied Gaza next year, pits Palestinian President Yasir Arafat's old guard against younger members of his Fatah movement, who are demanding the removal of officials seen as corrupt and changes in the security forces.
Prime Minister Ahmad Quraya last week tendered his resignation over the crisis and, although Arafat refused to accept it, the prime minister has made clear he will not withdraw it unless Arafat makes real changes.
Refugee camp stormed
An Arafat aide said a mediation team had been set up to negotiate between the president and prime minister and differences could be resolved at a Tuesday cabinet meeting.
Arafat, who has long resisted calls for reforms that might cost him influence, said on Saturday he would accept any government changes proposed by Quraya. He also made two new senior security appointments.
Quraya (L) has tendered his
resignation to Arafat
Meanwhile, just five kilometres from Arafat's battered West Bank compound, Israeli troops stormed a Palestinian refugee camp.
Witnesses said they opened fire towards hundreds of youths who pelted them with stones.
Witnesses said the invasion followed a report that an Israeli civilian strayed into Qalandia camp and had come under attack by residents. There was no immediate word of casualties.