Also on Sunday night, a senior Hamas leader announced a halt to attacks on Israel from the Gaza Strip.
The assassination came after Israel launched a massive arrest campaign and an air strike that damaged a school in Gaza City and wounded 15 people, including children.
Sunday night's air strike targeted a Mercedes driving along a coastal road in Gaza City carrying Islamic Jihad leader Muhammad Khalil, said Muhammad Dahdouh, another leader of the group.
The attack was at least the fourth Israeli attempt to kill Khalil in recent years. The group called for revenge and its members threatened to abandon a ceasefire in effect since February, Reuters reported.
Khalil's car was destroyed. A large crowd swarmed around the remains, and several people, including a man with medical gloves, dug through the charred wreckage.
The Israeli army said Khalil was responsible for several deadly terrorist attacks, including the 2 May 2004 shooting attack that killed Tali Hatuel, a pregnant Israeli settler, and her four young daughters as they drove along the main road to Israel's main bloc of Gaza settlements.
Palestinians evacuate an injured
man after the Israeli air strike
Khalil's bodyguard was also killed in the attack, according to health officials. Four bystanders were slightly wounded.
Atef Qatrous, 22, said he was leaving work when he saw a missile hit the car. One of those inside was decapitated and the other was badly wounded, he said.
Israeli troops on Sunday morning launched an extensive arrest campaign in which more than 200 activists from Hamas and Islamic Jihad were detained, Aljazeera learned.
Most of the detainees, among them leading Hamas figures Hassan Yousif and Muhammad Ghazal, were from Hebron and Ram Allah.
Israel named its military offensive in the Gaza Strip and West Bank the First Rain.
Weekend of violence
Earlier on Sunday, Israeli warplanes stuck a school in Gaza City, injuring 15 people, many of them children.
Palestinians inspect the the al-
Arkam school after missiles hit
In helicopter strikes on Saturday, Israel killed two fighters and wounded 20 other Palestinians.
Violence surged when a blast on Friday killed 16 people at a Hamas rally in Gaza. One of the victims, a 12-year-old Palestinian boy, died of his wounds on Sunday.
Hamas blamed Israel, and fighters fired rockets at the Jewish state in response, though Israel denied responsibility and the Palestinian Authority said Friday's explosion appeared to be an accident caused by Hamas members carrying explosives.
Palestinian leaders accused Israel of trying to wreck hopes of reviving peace talks that were kindled by the Gaza pullout.
President Mahmoud Abbas said that if Sharon had ordered the army to use full force it meant "he doesn't want peace, or security or negotiations".