Israeli helicopters then intervened and fired two missiles at the Palestinian fighters.
Separately, a Palestinian farmer was killed near Kisovim crossing in southern Gaza Strip.
Minivan targeted
Hamas said the five people killed in the attack in Khan Younis were members of the Izz al-Din al-Qassam Brigades, its armed wing.
Two missiles directly hit the minivan they were travelling in, witnesses told Al Jazeera, leaving parts of dead bodies scattered in the street.
Dr Moaiya Hassanain of the Gaza health ministry said four other people were wounded in the attack.
A spokeswoman for the Israeli military confirmed that it had "carried out strikes on vehicles in Khan Younis and identified hitting them."
The Israeli military carries out near-daily airstrikes in Gaza, targeting Palestinian armed groups firing rockets into Israel.
More than 200 people have been killed since Israel and the Palestinians resumed peace talks in November.