Medical sources said on Saturday that a Palestinian policeman and a civilian were among the dead.
Twelve people were also reported injured in the attack.
Earlier that day, Israeli occupation troops moved into the outskirts of Gaza City after resistance fighters fired mortar shells at a nearby Jewish settlement.
About 10 armoured vehicles and two bulldozers were seen staging an incursion into the Zaitun neighbourhood of east Gaza City, commandeering two houses, witnesses and security sources said.
The operation came after the armed wing of the resistance movement Hamas claimed it carried out a series of mortar attacks on settlements which damaged buildings but caused no casualties.
The Izz al-Din al-Qassam Brigades said they had fired three mortars at the settlement of Nisanit, to the north of Gaza City and another three at the southern Gaza settlement of Kfar Darom.
Israeli sources said the three mortar shells had damaged buildings in Kfar Darom while a building in Nisanit had also been damaged.
The attacks and subsequent incursion came ahead of the swearing-in ceremony for Palestinian President-elect Mahmud Abbas who has called for an end to the mortar and rocket attacks by Gaza-based resistance fighters, calling them counter-productive.
Hamas was one of three groups which carried out an attack on a crossing between Gaza and Israel on Thursday night which has prompted Israeli Prime Minister Ariel Sharon to indefinitely sever all contacts with the Palestinians.