Two bystanders were also wounded in the attack which took place on Tuesday evening, the sources said.
The Israeli air strike was the fourth in as many days in the Gaza Strip.
A witness, Ahman Barhoom, said he was driving about 200 metres behind the car when it exploded.
"A strong explosion went off in car, in the upper part of car, the front windows of my car were smashed and the car was like a big ball of fire," he said.
The two dead men were named by Fatah sources as Mohammed Abu Shareya and Suhale Baqer, both members of the Al-Aqsa faction that is loosely affiliated to Palestinian leader Mahmoud Abbas's Fatah movement.
Israeli defence claim
Israeli military sources confirmed they had carried out the strike, saying that the targets had been behind the firing of rockets from the Gaza Strip into southern Israel.
"The [Israeli military] did carry out an attack against a vehicle carrying Al-Aqsa terrorists in the city of Gaza," an army spokesman told reporters.
"The people targeted were involved in projectile rocket attacks."
Their deaths brought to 10 the number of militants killed in Israeli air strikes over the Gaza Strip since late Saturday in the worst cycle of violence since Islamist movement Hamas triumphed in last month's Palestinian election.
Yesterday, Israeli troops killed a local commander of Islamic Jihad in the West Bank town of Nablus, a day after an Israeli air strike killed two other fighters in Gaza.
The latest deaths have raised to 4950 the overall toll from the five-year intifada, based on an AFP count. More than three-quarters of the dead have been Palestinian.