A reporter for the AFP news agency said workers were placing 20 metre long pipes along the border, while witnesses in the town of Rafah said they could see Egyptian vehicles working across the fenced frontier.
Rafah residents told the agency that Egyptian engineers turned up one month ago with heavy earth-moving equipment and began digging.
They added that workers have begun driving long pipes into the ground at four or five metre intervals.
Israel has repeatedly complained that Egypt has not done enough to prevent smuggling into Gaza, which it says are used to supply Hamas with explosives and arms.
But in recent months Cairo has destroyed large numbers of tunnels, using detection equipment provided by Washington.
Israel has closed off Gaza to all but very limited basic supplies since Hamas seized it from loyalists of Palestinian president Mahmoud Abbas in June 2007.
The territory has since been dependent on smuggling for various supplies and the border is honeycombed with tunnels, which often collapse, sometimes claiming the lives of the smugglers.