At least 70 gunmen, believed to be from the armed wing of Hamas, created the hole about 70 metres from the Rafah border terminal allowing hundreds of Palestinians to cross before an Israeli helicopter opened fire.
An Israeli army spokeswoman said that a military helicopter had fired warning shots to stop a "flood of people" crossing the border.
One masked gunman said during the operation: "This is a gift from Hamas to the Palestinian people."
The Rafah border terminal, the only way into Gaza that avoids Israel, has been closed since June 25.
Western diplomats said Israel prevented Rafah from opening by stopping European monitors getting to the terminal, citing security concerns.
Palestinians technically control the crossing, but its operations can be blocked by the Israelis.
Israel said it had offered to let the Palestinians pass through the nearby Kerem Shalom border crossing into Gaza. Palestinian officials rejected the Israeli offer and insisted that Rafah be reopened.
At least 70 Palestinian gunmen
blew a whole in the a border wall
Up to 6,000 people have been stuck on the Egyptian side of the border, according to Palestinian security sources. At least six have died during the wait including a 15-year-old boy who had undergone heart surgery in Cairo and an 18-month-old boy who suffered heat stroke.
Palestinian gunmen have regularly breached the wall separating Gaza and Egypt, most recently on June 29, when guards prevented people from crossing.
More than 80 Palestinians have been killed since Israel launched its offensive into the Gaza Strip after Corporal Gilad Shalit was taken by Palestinian gunmen.