Witnesses said the target of the attack after nightfall on Thursday was a white Subaru car in the Jabalya refugee camp, a sprawling shanty town next to Gaza City.
Late on Thursday, Israeli warplanes also launched a series of bombing raids again in northern Gaza.
Palestinian security officials said Israeli fighter jets had bombed three areas of northern Gaza, targeting open fields used by resistance fighters to fire rockets into southern Israel.
There were no reports of any casualties in the air raids, which the Israeli army said was aimed at rocket-launching sites used by Palestinian fighters.
Witnesses in the area said they had seen fighters from
Islamic Jihad firing at least two missiles into southern Israel in
response to the earlier airstrike which killed two fighters from
the movement's armed wing, the al-Quds Brigades.
Muhanna, the Islamic Jihad field commander in northern Gaza, was killed along with his assistant, Muhammad Ghazaina, according to Islamic Jihad.
An Associated Press reporter saw the two charred bodies.
Aljazeera's correspondent in Gaza, Wail al-Dahduh, reported that two members of al-Quds Brigades, the military wing of Islamic Jihad, were killed in the explosion in Bait Lahiya, in northern Gaza.
The explosion was the result of a rocket attack that targeted a car in the area, he said, adding that an unmanned aircraft appeared to have fired at least one rocket at a car which was travelling through the area.
The rocket destroyed the car, scattering body parts as it found its targets, al-Dahduh said.
The attack came as Palestinians were leaving mosques after evening prayers, witnesses told AP, and at least six people were taken to hospital.
Five of the dead are thought to be bystanders with no connection to the fighters, security sources said.
Medics said a man in his 60s and a teenage boy were among the dead, but the identities of the victims were not immediately clear. Another 20 people were injured in the blast, five of whom were in a serious condition.
Angry Palestinians demonstrated around the scene of the attack. Channel 10 TV showed footage of people waving what appeared to be a body part in the air.
Islamic Jihad's al-Quds Brigades
claimed Thursday's Hadera blast
The Israeli military confirmed it carried out the attack. "In a security forces operation this evening in the northern Gaza Strip, the Israel Air Force attacked a vehicle carrying a senior Islamic Jihad terrorist who was responsible for several murderous terrorist attacks," the military said in a statement.
Palestinian negotiator Saeb Erikat said: "We want to condemn this attack and warn about the consequences of this escalation."
Both the political and the military wings of Islamic Jihad condemned the air strike and vowed to respond. "We will not stand idly by with our hands tied in the face of this Israeli aggression," the group said.
Earlier on Thursday, an Islamic Jihad leader has been captured by Israeli occupation soldiers amid gun battles after army Jeeps and tanks moved into the West Bank city of Jenin, Palestinian security sources said.
Abd al-Khalim Izz al-Din, 40, who lived in the city, was one of the top commanders of the resistance group in the occupied Palestinian territory.
About 40 Jeeps and tanks moved into Jenin on Thursday and surrounded houses as shooting rang out and two Israeli Apache helicopters circled in the sky overhead, the security sources said.
Firefights erupted between Palestinian fighters and Israeli troops in Haifa Street at the western entrance to the city, in an operation launched less than 24 hours after a human bombing claimed by Islamic Jihad killed five Israelis.
Earlier, Israeli warplanes launched two air raids in the Gaza Strip.
Israel's latest air strikes occurred on the third successive day of raids over the Gaza Strip. The bloodshed has threatened to unravel an already shaky ceasefire.
Israeli Prime Minister Ariel Sharon on Thursday promised an open-ended offensive against Palestinian armed groups.
Sharon said there could be no advance towards peace now because of the "absolute failure of the Palestinian Authority in the fight against terrorism".
"Our action will be broad and will not stop until it brings about a cessation of terrorism," Sharon said before a meeting with Russian Foreign Minister Sergei Lavrov in Tel Aviv.
Bomber Hasan Abu Zaid's attack
was claimed by Islamic Jihad
An Israeli Interior Ministry statement said the first strike on Thursday before dawn was carried out near the northern village of Bait Hanun, while the second, carried out by F16 fighter jets, struck a newly built bridge in the village.
The Israeli military said it launched the air raids to prevent resistance fighters from firing rockets into Israel during the worst flare-up of violence since Israel withdrew from Gaza last month after 38 years of occupation.
No casualties were reported in the air raids mounted in response to rocket attacks since Monday.
Aljazeera's correspondent reported that more than 30 military vehicles stormed into the town of Qabatia, home to the Palestinian who is said to have carried out the market attack.
Israeli occupation forces surrounded the home of Hasan Abu Zaid, the correspondent said.
Islamic Jihad, while claiming responsibility for the latest
attack, said it was avenging Israel's killing of one of its top West Bank commanders on Monday.
The army is also imposing a general curfew on the West Bank and all crossings into Palestinian-controlled areas will be closed. In addition, "northern Samaria will be cut off from the rest of the West Bank, and no privately owned Palestinian vehicles will be allowed to travel in that area", the Israeli newspaper Haaretz reported.
An operation against Qassam rocket launchers in the northern Gaza Strip will be launched, and ground forces will be deployed for a possible incursion into the Strip, added the report.
The Erez and Karni crossings will
be sealed by Israeli forces
Israeli army tanks are expected to enter Qassam launch zones near Bait Hanun in northern Gaza.
The report also stated that the operation in the northern West Bank will encompass the cities of Jenin and Tulkarim and large villages such as Qabatiya, the bomber's home town Yaabed, Atil, Saida and Ilar.
The army will impose a closure on the villages and attempt to arrest known Islamic Jihad activists and supporters, the report continued.
It was also decided at a meeting of the Israel Defence Forces' General Staff on Wednesday that the Erez and Karni crossings between Gaza and Israel would be re-shut, reported Haaretz.
Meanwhile, Palestinian President Mahmoud Abbas condemned the bombing and pledged to try to salvage the truce he engineered earlier this year.
"It harms the interest of the Palestinian people and leads to expansion of the cycle of violence," he said.
Political fallout from Wednesday's blast was equally swift. Israel, which suspended security contacts after three young Jewish settlers were killed in a West Bank ambush last week, cancelled a meeting between the Israeli and Palestinian transport ministers.
Mahmoud Abbas has pledged to
salvage the truce he engineered
Islamic Jihad, sworn to Israel's destruction, had vowed revenge after Israeli troops shot and killed West Bank commander Luai al-Saadi, the most senior leader killed since the truce began.
Khadir Habib, an Islamic Jihad leader in Gaza, called the Hadera bombing "a natural reaction to crimes of the occupation".
Asked about Abbas's condemnation of the bombing, an Islamic Jihad spokesman said: "Anyone who criticises the resistance is a violator of the national consensus and stands beside the enemy."