Witnesses and medics said six other Palestinians were wounded in the attack in the early hours of Thursday when an Israeli drone fired two missiles.
Clashes erupted when Israeli tanks and troops pushed into Khan Yunus shortly after midnight with tank fire and two missile strikes from a drone hovering overhead.
Two of the three killed belonged to the Palestinian resistance group Hamas while the other was an 18-year-old civilian resident.
An Israeli military source said the missiles targeted two groups of Palestinian fighters while a tank launched a shell to drive back other armed men trying to close in on soldiers.
"The army is operating in an area from which terrorists continue to launch mortars and rockets into Israeli communities in Gaza, and we will keep up such activities until this firing stops," the source said.
It was the third Israeli army raid into Khan Yunus in the past week.