A Palestinian teenager was shot dead by Israeli troops as the army ended its two-day raid on the Rafah refugee camp in its search for weapons-smuggling tunnels.
Israel says it will continue to demolish tunnels
The 19-year-old died after he was hit by a bullet in the chest - bringing to eight the number of Palestinians killed during the Gaza Strip operation.
At least 40 Israeli tanks were seen withdrawing from the Rafah camp on Saturday evening and retreating to the border area with Egypt, which is under Israeli control.
But a military official told the AFP news agency that such operations would continue as long as smuggling activities remained.
Operation Root Canal was launched overnight on Thursday by dozens of Israeli troops backed by tanks and helicopter gunships.
Seven Palestinians - including two boys aged eight and 15 - were killed on the first day and more than 50 have been injured.
Up to 10 homes were demolished and water and electricity facilities were hit, said Palestinian sources.
The Israeli army said it had discovered three tunnels in the camp, but no weapons have been found so far.
The Israeli military official confirmed troops were pulling back.
"Some forces are stepping out," he told AFP. "But the activity is still ongoing, forces are still there and it will go on as long as the smuggling activity continues."
Correspondents say the raid marks a change from previous Israeli tactics of launching brief incursions into Palestinian-controlled areas.
Israel defended its actions saying it had intelligence that Palestinian militants were seeking to smuggle from Egypt shoulder-fired missiles that could be used against tanks, helicopters and fighter jets.
"If we are successful ... blowing up most of [the tunnels], hopefully all of them, for some time at least they won't be used or there won't be any sort of smuggling of that sort," Israeli Government spokesman Zalman Shoval told the BBC's World Today programme.
United Nations Secretary General Kofi Annan condemned the killing of Palestinian civilians during the incursion.
"Not for the first time, the secretary general reminds Israel that the disproportionate use of force in densely populated areas is not compatible with international humanitarian law," he said in a statement.
He called on both sides in the conflict "to take every measure to avoid harming innocent civilians".
An aide to Palestinian leader Yasser Arafat also condemned the raid.
"We strongly condemn these Israeli war crimes which are causing a human tragedy," Nabil Abu Rudeina said.
"This Israeli escalation is not just threatening the peace process here, it's threatening the area and the region."