Tens of thousands of Palestinians have taken part in the funeral of Sheikh Ahmed Yassin, the assassinated founder of the militant group Hamas.
Yassin had been returning from morning prayers at the mosque
The paraplegic cleric, who Israel says masterminded suicide bombings, was targeted by helicopter gunships in Gaza after leaving dawn prayers at a mosque.
His death sparked calls for revenge by Hamas and condemnations from abroad.
Israel had warned often that it would target the Hamas founder after his group killed hundreds of Israelis.
In September, Israeli forces narrowly missed him after firing on a house where he had been having lunch with fellow Hamas members a short while earlier.
UN Secretary General Kofi Annan condemned the attack on Monday, saying it was against international law and did nothing to further the Middle East peace process.
But Washington pointedly refused to criticise Israel over the killing, saying the country had a right to defend itself.
Asked by reporters if the US condemned the strike, White House spokesman Scott McClellan repeatedly said Hamas was a "terrorist" organisation and that Yassin had been personally involved in terror.
Sheikh Yassin is by far the most significant militant figure to have been killed by Israel in the three years of the intifada and the country is on high alert in expectation of a violent response.
The 67-year-old was leaving a mosque in Gaza's Sabra district in his wheelchair with an entourage when they were attacked by Israeli helicopter gunships.
Two bodyguards and one of Sheikh Yassin's sons were reported to be among the seven people killed. At least 15 people were wounded.
At the funeral procession in Gaza City, mourners jostled to touch the sheikh's coffin, which was draped in a green Hamas flag.
Gunmen wearing Hamas headbands fired shots in the air.
Hamas warned that Israeli Prime Minister Ariel Sharon had "opened the gates of hell and nothing will stop us from cutting off his head".
Senior Hamas leader Abdul Aziz al-Rantissi said: "The battle is open and war between us and them is open".
But Mr Sharon congratulated the Israeli security forces for conducting a successful operation and vowed to continue Israel's policy of targeting militant leaders.
He said Sheikh Yassin was an "arch-terrorist" who plotted attacks that killed hundreds of Israelis.
But his Palestinian counterpart Ahmed Qurei called the attack on Sheikh Yassin a "dangerous, cowardly act".
The US appealed for calm and restraint, saying it had no prior warning of the attack and was not involved in it.
And White House spokesman McClellan urged all parties to be aware of the consequences of their actions.
Some critics say that Washington's spasmodic engagement - at best - with the peace process, and the lack of a restraining hand on Mr Sharon, have allowed the violence to get out of hand, says the BBC's diplomatic correspondent Barnaby Mason.
UK Foreign Secretary Jack Straw said the killing was "unjustified" and "very unlikely to achieve its objective".
France also joined in the condemnation, and European Union foreign policy chief Javier Solana said it was "very, very bad news" for the peace process.
Mediators from the US, UN, Russia and EU are to hold emergency talks in Cairo on Monday to discuss the killing.
After news of the killing broke, crowds took to the streets in Gaza.
The protests quickly spread to other Palestinian areas, and clashes broke out between youths and Israeli soldiers.
Tens of thousands showed their fury in Gaza
A Palestinian journalist was killed by troops while covering a protest in the West Bank town of Nablus, Palestinian sources say.
Three protesters were also reported to have been killed in separate incidents.
Israeli sources have not confirmed any of the deaths.
Israel sealed off the West Bank and Gaza Strip after the killing, barring Palestinians from entering the Jewish state.
Palestinian leader Yasser Arafat has declared three days of mourning.