The bombing came hours after an Israeli attack in Gaza City
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At least two people have been injured, one seriously, after Palestinian militants fired mortars at an Israeli settlement in the Gaza Strip.
The Islamic militant group Hamas said it was responsible for the attack on Neve Dekalim.
It came hours after an Israeli attack on a senior Hamas activist in Gaza City, which killed five people.
Hamas said a missile hit the home of one of its top commanders, Ahmed al-Jabari, injuring him.
Dozens wounded
Among those killed were Mr Jabari's son and three known militants, Reuters news agency reported.
At least a dozen others were wounded.
Palestinian witnesses were divided over whether the explosion in the city's Shajaiyeh district was caused by an air-launched rocket or a ground device.
A spokeswoman for the Israeli military said only that the army had "targeted a senior Hamas terrorist".
Israel has attacked a number of prominent Hamas figures with air strikes this year, killing spiritual leader Sheikh Ahmed Yassin in March and his successor, Abdel Azziz al-Rantissi, a month later.
"We heard a loud explosion and ran outside," a neighbour of Mr Jabari told Reuters news agency.
"We saw [Jabari's] house was completely on fire."