One of the Palestinians was shot dead by guards protecting Israeli settlements while the other was killed by soldiers during a search operation in the early hours of Sunday, Israeli military sources said.
The two have been identified as Yahya Abu Taha, 22, a member of Islamic Jihad's military wing, al-Quds Brigades, and Tariq Yasin, 21, who belonged to Fatah's al-Aqsa Martyrs Brigades, Aljazeera correspondent in Gaza Wail Dahduh reported.
Earlier, the two Palestinians opened fire near the Kissufim checkpoint between the Gaza Strip and Israeli territory, targeting a convoy of cars carrying Israeli civilians visiting the Gaza settlements which are due to be closed down next month.
A married Israeli couple from Jerusalem was killed and five other Israelis were injured by gunfire.
Dahduh also reported that Israel shut down the electricity in the Khan Yunus area after the killings and its helicopters were hovering over the refugee camp.
The bodies of the dead Palestinians have been handed over to Palestinian paramedics.
Meanwhile, Israeli occupation forces are still sealing off the Abo Holi checkpoint, dividing the Gaza Strip into two and preventing Palestinians from travelling between them.
Sharon issues threat
Israeli Prime Minister Ariel Sharon on Sunday threatened harsh military action against Palestinian resistance fighters, following the shooting of the Israeli couple.
Sharon told a weekly cabinet meeting that Israel would not tolerate "terrorism" and that he had spelt out his position during talks with US Secretary of State Condoleezza Rice over the weekend.
Israel has threatened a broad
offensive unless rockets stop
"I explained to the secretary of state that there would responses of another type that will amount to very harsh measures, both during the withdrawal and after the evacuation from Gaza if there are terrorist attacks," he said.
"Israel will not put up with terrorism. I told the American secretary of state that instructions have been given and the Israeli army will respond with toughness against terrorism," he added.
Last week, Israeli authorities threatened a large-scale ground offensive into the Gaza Strip unless the Palestinian Authority brought an end to Palestinian rocket attacks.
Alleged bombers caught
Also, the Israeli military said it had arrested an alleged bomber, with a 5-kg explosive belt, who infiltrated Israel from the Gaza Strip.
An 18-year-old alleged bomber
was detained by Israeli forces
The 18-year-old Palestinian was identified as Jihad Shahada, from the Jabalya Palestinian refugee camp in the northern Gaza Strip.
Israeli interrogators said he planned to blow himself up in the Tel Aviv area.
A second man was later arrested in the town of Jaffa, adjacent to Tel Aviv, the military said.
Accused of fabrication
The al-Aqsa Martyrs Brigades issued a statement saying this was another Israeli fabrication, and denied reports that the suspect was a member of the movement.
A spokesman for the Palestinian resistance group in Gaza said: "This man is not a member of al-Aqsa Brigades and al-Aqsa is not involved in this fabricated Israeli story," said the spokesman, identifying himself as Abu Ahmad.
Saturday's incidents took place as US Secretary of State Condoleezza Rice left the region after a three-day visit aimed at shoring up a fragile truce.
"This man is not a member of al-Aqsa Brigades and al-Aqsa is not involved in this fabricated Israeli story"
Abu Ahmad, spokesman,
al-Aqsa Martyrs Brigades
During her visit, Rice separately met Israeli and Palestinian leaders over three days - the third time that has happened since she took over at the State Department in January.
Rice came to the region in a hastily arranged trip to try and rescue the shaky Middle East truce amid an escalation of violence, determined that Israel's mid-August "disengagement" from the Gaza Strip go ahead as planned.