The Egyptian crackdown began after Palestinian fighters on Wednesday bulldozed a path through the barricade lining the frontier.
The fighters seized bulldozers and smashed through the border wall between Gaza and Egypt, Aljazeera and agencies said quoting Palestinian security officials at the border.
The fighters who stormed the border were said to be angry at the jailing of their leader by the Palestinian police.
The men, from al-Aqsa Martyrs Brigades, an offshoot of the Fatah party, decided to attack the border wall hours after rampaging through Rafah, closing the border crossing and occupying four government buildings.
Soon afterwards, Egyptian security forces beefed up their presence at the site to prevent thousands of Palestinians who had gathered at the other side from crossing the border, Aljazeera reports.
Witnesses said Egyptian security personnel fired into the air to force Palestinians back to the Palestinian side of Rafah.
The border drama began when about 50 Brigades cadres stormed the Rafah municipality headquarters and seized one of its bulldozers, Aljazeera's Gaza correspondent Wail al-Dahduh said.
One of the fighters then drove the bulldozer towards the wall separating the Egyptian and Palestinian sides of Rafah, while the rest of the fighters followed him, he said.
The fighters then started ramming a section of this wall.
Some of them were trying to smash other parts of the border wall, al-Dahduh reported.
Fighters are running riot at the
Rafah crossing from Gaza
Another group of Brigades fighters closed the road leading to and from the Rafah terminal's outer gate, blocking traffic in the area.
The fighters also planted explosives and placed mortar shells at the entrance of the crossing.
Watching the operation was a large crowd of Palestinians, but Palestinian Authority security official personnel were conspicuous by their absence.
Hours earlier, Aljazeera's correspondent reported that fighters had blocked access to the Gaza-Egypt border and prevented travellers from reaching the crossing point.
An estimated 40 masked fighters from the al-Aqsa Martyrs' Brigades also stormed the headquarters of the Palestinian legislative council and the electoral central committee in Rafah.
Before that, the armed group stormed the headquarters of the Interior Ministry in the city in protest against the arrest of their colleague by Palestinian security forces on Tuesday over suspected involvement in the abduction of three Britons last week.
On Tuesday, Palestinian intelligence arrested Alaa al-Hams on suspicion he and his followers kidnapped human-rights activist Kate Burton and her parents for two days last week.
The Burtons were among 19 foreigners abducted by Fatah fighters in Gaza in recent months. All have been freed unharmed.
The armed men blocked access
to the Gaza-Egypt border
On Wednesday morning, some of the armed men took over the central election office in Rafah, the local branch of the Palestinian parliament, a local court and another government building.
A truckload of armed men then drove to the nearby Rafah border crossing, Gaza's main gate to the world.
Firing in the air, they closed the entrance gate to the crossing compound and told waiting travellers to leave the area.
One of the fighters, who gave his name as Ahmed, said the group was demanding al-Hams' release.
In another development, a 38-year-old Palestinian was shot dead on Wednesday by the Israeli occupation army in the Hebron region of the southern West Bank, medical and military sources said.
Witnesses said Mustapha Ibrahim Awlad Mohammed was killed in Tarrama, to the southwest of Hebron, when troops entered the village at daybreak.
The Israeli military said that troops who had come to arrest Mohammed had opened fire on the victim when he refused orders to lay down a weapon he was carrying.
"[Awlad Mohammed] directed his weapon towards the force and refused to put it down"
Israeli army spokesperson
"He directed his weapon towards the force and refused to put it down. Soldiers then opened fire on him," an Israeli army spokesperson said.
It was not immediately known whether Mohammed was a member of any armed faction.
The latest death raised to 4928 the number of people killed since the intifada broke out in September 2000.
More than three quarters of the victims have been Palestinian.