The resulting explosion early on Wednesday morning killed five and wounded 12 more civilians when it tore through the home of Ahmad al-Shabari.
Tel Aviv accuses al-Shabari of belonging to the Izz al-Din al-Qassam Brigades, but the assassination attempt failed to kill him.
Medics said four people were pronounced dead immediately upon arrival at hospital after the explosion on the eastern outskirts of Gaza City. A fifth later died from his wounds.
Al-Shabari suffered leg injuries. Eleven other civilians were also wounded.
Witnesses in the eastern al-Shijaiya quarter confirmed they had "heard a loud explosion and ran outside - we saw [al-Jabari's] house was completely on fire".
The Israeli occupation force has claimed responsibility for the explosion. "In an Israeli security forces operation in the northern Gaza Strip, the Israel Defence Forces targeted a senior Hamas terrorist," an army spokeswoman said.
Meanwhile, occupation forces in the West Bank sent soldiers to arrest an alleged leader of the al-Aqsa Martyrs Brigades resistance movement.
About 15 jeeps drove into the town late on Tuesday night to arrest Atif Shaaban and Ahmad Dalu.