The attack occurred early on Sunday morning as Palestinians headed to mosques for the morning prayers.
The missile appeared to have been aimed at resistance fighters from al-Quds Brigades, Islamic Jihad's military wing, Aljazeera's correspondent reports.
The dead are Sharif Musallam and his brother Umar, who were on night-watch duty organised by Palestinian resistance factions in the area.
The missile hit the group directly, scattering body parts, and killing them instantly. Four civilians were injured, two seriously.
The attack comes at a time of heightened tension in the area.
Palestinian factions fear a build-up of occupation soldiers stationed at the nearby al-Tuffah military checkpoint and settlements surrounding the northern and western quarters of the sprawling refugee camp, may be a prelude to a military assault.
In the West Bank, Israeli ground forces backed by a helicopter stormed a Palestinian refugee camp in the West Bank city of Nablus early on Sunday.
About 30 jeeps and armoured vehicles entered Ain Bait al-Ma camp to look for Palestinian activists, witnesses said.
Israeli occupation forces have imposed a curfew on the camp and were carrying out door-to-door searches.
With the violence continuing, Israel's cabinet is to decide on a bill that would set out how to implement Prime Minister Ariel Sharon's controversial pullout plan to evacuate 8000 Israeli settlers from the Gaza Strip.
The cabinet meeting comes before a critical parliamentary vote on Tuesday on Sharon's plans, which envisages moving out the settlers now living in the Gaza Strip and closing down only four small settlements in the north of the West Bank.
The Israeli cabinet is to meet on
Sunday to decide on the bill
The spiritual leader of Israel's influential Shas party ordered its 11 lawmakers on Saturday to vote against the pullout, but Sharon was still expected to win parliamentary approval.
However, it was a blow for Sharon who had hoped for broad parliamentary support for his plan for a Gaza withdrawal next year, and whose coalition has lost its majority in the assembly due to the defection of ultra-rightists opposed to ceding land.
Political analysts said Rabbi Ovadia Yosef's ruling was unlikely to affect the outcome of the vote on the plan because Sharon was likely to win 67 votes in the 120-member parliament with support from left-wing parties.
"There is no question that you must vote against it," Yosef said during his weekly televised sermon. "It is a real danger to the people of Israel," he added later, pounding his fist on a table.
Sharon has vowed to remove all 21 settlements in Gaza and four of 120 enclaves in the West Bank by the end of 2005, under a strategy to "disengage" from four years of conflict with Palestinians.
However, even after Israel withdraws from the Gaza Strip, it will still be considered under international law as the occupying power and be held responsible for the crowded territory, according to an internal Israeli government assessment obtained by The Associated Press.
Sharon wants to remove all
21 settlements in Gaza
"We must be aware that the disengagement does not necessarily exempt Israel from responsibility in the evacuated territories," said the 47-page report.
Israel could reduce its responsibility over the territory, where 8200 Jewish settlers currently live among 1.3 million Palestinians, if someone else were to take control there, the report said.
"The more active control is given to other parties, the more difficult it will be to claim Israel is still responsible," the study said.