The head of the Hamas militant Islamic movement in Gaza, Abdel Aziz al-Rantissi, has been killed in a targeted Israeli missile strike on his car.
Crowds of Palestinians converged at the site of the attack
Rantissi's death came 26 days after the founder of Hamas, Sheikh Ahmed Yassin, was killed in another "targeted killing" by the Israeli military .
Two other people in Rantissi's car died and several passers-by were hurt.
Earlier a suicide bomber killed himself and an Israeli soldier at the Erez checkpoint just north of Gaza City.
The BBC's Peter Greste in Gaza City says people are speculating that the attack on the Hamas chief was in response to the suicide bombing.
The force of the explosion at about 2030 (1730 GMT) was felt around the city.
There have been reports that the car was hit by two more missiles.
Two people, believed to be one of Rantissi's sons and a bodyguard, were killed instantly, but the Hamas leader himself was still alive and was taken to Gaza's al-Shifa hospital.
Surgeons operated on Rantissi, but he died at the hospital.
The first doctor to treat Rantissi, Joma el-Saka, told the BBC that the Hamas leader was in a serious condition when he arrived, with a severe head injury and multiple shrapnel wounds to his neck and torso.
He described Rantissi as being in "the terminal stage, alive, but gasping for breath".
"There is no hospital that could have saved him in the whole world," Dr Saka said.
Crowds of Hamas supporters converged at both the scene of the attack and the hospital to demonstrate their anger and vow revenge.
"Israel will regret this. Revenge is coming," another Hamas leader, Ismail Haniya, told reporters at the hospital.
"This blood will not be wasted. It is our fate in Hamas and it is our fate as Palestinians to die as martyrs."
Palestinians swarmed around and on top of the wreckage of Rantissi's white car and the streets across Gaza City were filled by tens of thousands of residents pouring from their homes to voice their outrage at the killing.
The militant leader was one of Israel's top targets after he took over the leadership of Hamas in Gaza in the wake of Sheikh Yassin's assassination in a similar missile strike.
Khaled Meshaal - Hamas' politburo chief in exile - was declared the group's overall leader after Yassin was killed.
The Israeli army confirmed that it had carried out the attack saying in a statement that Rantissi was "a mastermind of terrorism... directly responsible for the killing of scores of Israelis in numerous terror attacks".
The US reiterated its policy that Israel "has the right to defend itself from terrorist attack".
But a White House spokesman added that the US "strongly urges Israel to consider carefully the consequences of its actions, and we again urge all parties to exercise maximum restraint at this time".
The Palestinian Authority condemned the killing, accusing Israeli of "state terror".
"It is evident now to the world that the Palestinian people need international protection more than ever," Palestinian Cabinet minister Saeb Erekat told the Reuters news agency.
UK Foreign Secretary Jack Straw said: "The British government has made it repeatedly clear that so-called 'targeted assassinations' of this kind are unlawful, unjustified and counter-productive."
A spokesman for the Arab League, Hossam Zaki, said the organisation condemned the incident, describing it as "state terrorism".
The timing of the attack is particularly sensitive. On Wednesday Israeli Prime Minister Ariel Sharon won US President George W Bush's backing for his controversial plan of "unilateral disengagement".
Under the plan Mr Sharon proposes that Israel pulls out of Gaza including relocating all the existing Jewish settlements there.
But Mr Sharon also proposes that Israel will retain control of large areas of the West Bank.
The Palestinians have criticised the plan saying it will wreck all peace hopes, but Mr Bush surprised observers by supporting the plan, which he described as "historic and courageous".