The entry of the Hamas fighters - including one of the group's founders - through the border crossing at Rafah threatened to prompt Israeli economic sanctions, which would further batter Gaza's shattered economy.
Palestinian security officials acknowledged that wanted men had entered Gaza through Rafah, but said anyone with a Palestinian identity card can come into the coastal strip.
They said Israel was making demands that were not part of the crossing accord.
Israel closed the Rafah passage, Gaza's main gateway to the outside world, shortly before withdrawing from the strip in early September.
The crossing reopened last week after months of wrangling between Israel and the Palestinians over security procedures - and only after Condoleezza Rice, the US Secretary of State, applied heavy pressure to both sides to clinch a deal.
Israel was afraid that fighters or arms would flow into Gaza through Rafah, but agreed to let the border reopen after the Palestinians accepted the presence of European monitors and installed security cameras that were to let Israel monitor the crossing live.
In recent days, Israel has complained that the information it is receiving has been delayed.
Sharon wants real-time video
footage along the Rafah border
On Thursday, Ariel Sharon, Israel's prime minister, said that if his authorities did not receive real-time information Israel would expel Gaza from a customs agreement, in effect severing its economic ties with Palestinians in the West Bank.
"If it turns out that we don't have real-time monitoring of who is coming in, Israel has one tool - perhaps the most effective and the most painful - that the crossings between the Gaza Strip and Israel ... will become (international) border crossings," Sharon said, and the customs arrangement will be rescinded.
Rashid Abu Shbak, the security chief in Gaza, said Israel's complaints were unfounded.
"Under the agreement, we transmit footage to a joint operation room in southern Israel," he said. "The Israelis want to link that room to their computer, and we objected because this is a breach of the accord."
All people with Palestinian identity cards are allowed through the crossing, he said, but he could not confirm Israel Radio's report on Friday that up to 15 wanted men have entered Gaza recently.
Israel Radio said the fighters had either been expelled from Palestinian territories by Israel, or fled.
Mahmoud Zahar's brother may
have re-entered Gaza
Some left before the first Palestinian uprising against Israel broke out in 1987.
They included Ahmed el-Malah, the founder of Hamas, and Fadel Zahar, a brother of Mahmoud Zahar, the Hamas leader expelled to Lebanon by Israel in 1991.
Sharon aides visited Cairo last week to ask Hosni Mubarak, Egypt's president, to tighten oversight at the border, Israel Radio reported.
Egyptian officials were not immediately available for comment on Friday. Officials at the US Embassy in Tel Aviv declined comment on the Rafah dispute.