The second dead man was identified as Nidal al-Amoudi of al-Aqsa Martyrs Brigades, an offshoot of the Fatah faction, headed by Mahmoud Abbas, the Palestinian president.
'Targeted killing'
Israeli security sources described the attack as a "targeted killing", which is designed to assassinate enemy operatives, not thwart an imminent attack.
Agencies reported quoting Israeli sources that one of the dead men was Maher al-Mabhouh, a senior member of the Islamic Army group, which was involved in the abduction of Gilad Shalit, an Israeli soldier, in Gaza in June 2006.
The same group was responsible for the kidnapping last year of Alan Johnston, a BBC journalist.
Shalit is still being held. Johnston was released by his captors after being held for several months.
Gaza deaths
In related news, Yuval Diskin, Shin Bet's security chief, said in Jerusalem on Sunday said that Israeli security forces killed 810 Palestinians in the Gaza Strip in 2006 and 2007.
He said that some 200 of those killed were not clearly linked to terrorist organisations.
Haaretz, the Israeli daily, however, calculated that 360 were civilians who were not affiliated with any armed organisations.
B'Tselem, an Israeli human rights organisation, said that of those killed, 152 were minors, including 48 under the age of 14.
More meetings
Meanwhile, peace negotiators are set to begin talks on the core issues of the Israeli-Palestinian conflict on Monday, Abbas said.
In a speech on Sunday in the West Bank town of Ramallah before the central committee of the Palestine Liberation Organisation's parliament, Abbas said Ahmed Qurei, a former Palestinian prime minister, and Tzipi Livni, the Israeli foreign minister, "will begin final status negotiations on Monday".
A senior aide to Livni confirmed the talks will be held in Jerusalem on Monday "as part of the ongoing meetings between the two sides".