On Monday a Palestinian was shot dead and 10 others wounded at the crossing, Palestinian medical sources said.
The Israeli army said armed men from the Palestinian side opened fire at the people in an attempt to force them to return them to Gaza.
The Israeli military action came as Fatah moved to break off all contacts with Hamas.
The decision was made in a meeting of the Fatah Central Committee, said Azzam al-Ahmed.
Hamas said it wanted to hold talks with Fatah but it didn't recognise the Palestinian president's decision to outlaw Hamas's Executive Force.
'We are not safe'
Palestinians trapped at Erez, many of them Fatah supporters, are attempting to leave Gaza for the West Bank or Israel after Hamas's takeover last week.
"This is the fifth day for us in the crossing," said Um Mohammed.
"We will not be able to come back to Gaza. Internal fighting chased us to Erez after we fled from Gaza. We fled Gaza because we are not safe - everybody is threatened."
"Hamas must decide what their objective is - is it power, is it Israel's destruction, or is it peace for the Palestinian people?
Chris, Stockholm, Sweden
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Tawfiq Yaghi said he sought to bring his wife to Israel for chemotherapy: "Yesterday, the Israeli army fired a tear gas (canister) that fell near me and we were suffocated.
"It is a humanitarian case and I must be allowed. My wife is dying."
The operation came on the eve of talks between Ehud Olmert, the Israeli prime minister, and George Bush, the US president, at the White House.
The Israeli leader aims to bolster Mahmoud Abbas, the Western-backed Palestinian president.
Israel allowed about 50 senior Fatah officials and their families to cross into the West Bank from Gaza over the weekend, citing threats to their safety.
About 200 other Fatah officials are in Egypt, trying to travel to the West Bank via Jordan, Fatah officials said.
The situation at the Erez crossing was expected to be one of the first issues Israel's new defence minister, Ehud Barak, will tackle.
Barak, a former prime minister and military chief of staff, was installed as defense minister in a ceremony on Tuesday.
Hamas declared a general amnesty for Fatah fighters shortly after it took control in Gaza, but frightened civilians and security officers have not been reassured.