Police sources said the diplomat, named by Egypt's representative offices in Gaza City as Hussam al-Musseli, was heading towards his office in the al-Rimal neighbourhood of Gaza City on Thursday when the masked men surrounded his car and forced him into another vehicle.
The kidnappers then took off on a coastal road heading toward the southern Gaza Strip.
Egyptian officials confirmed the kidnapping and said the diplomat worked as a military adviser in the diplomatic mission.
Palestinian police erected barricades as part of an attempt to find the captors and the diplomat who was described by Palestinian sources as a military adviser.
An Egyptian delegation has been in the Gaza Strip for several months with the aim of helping the Palestinian Authority to reorganise its security forces after Israel's withdrawal from the territory last September.
About 30 Egyptian military instructors who had helped to train Palestinian security forces left the Gaza Strip last week at the end of their mission.
Italian Alessandro Bernardini (C)
was abducted last month
Palestinian armed men have kidnapped about 20 foreigners briefly in the past, often to press demands for jobs, but never have they abducted an Egyptian.
The kidnappings have been largely concentrated in the southern Gaza Strip, close to the border with Egypt.
All those who were abducted have been released unharmed, usually within a few hours.
Among those who were kidnapped last month were a British aid worker and her parents as well as an Italian member of a delegation who had travelled to the territory in a show of solidarity with the Palestinians.
No diplomats had been kidnapped before Thursday's incident, although three American contractors working as security guards for the US embassy in Tel Aviv were killed in October 2003 in an attack on a US diplomatic convoy in Gaza.
Mahmoud Abbas, the Palestinian leader, has failed to make good on repeated promises to address the security chaos in the Palestinian territories, especially in Gaza where armed men from a plethora of resistance factions often operate above the law.
Abbas's Fatah faction was heavily defeated in a general election by Hamas amid widespread anger over the deteriorating security situation.