Gunfire hampered efforts to evacuate the wounded
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Five Israeli troops have been killed in an attack by Palestinian militants on a checkpoint on the border between the Gaza Strip and Egypt.
Reports said that explosives went off in a tunnel under the checkpoint in Rafah and a second blast followed shortly afterwards.
Hamas said it carried out the raid, in conjunction with a group called the Fatah Hawks. Two militants were killed.
Hours later Israeli helicopter gunships fired rockets at targets in Gaza City.
The air strike hit a series of targets, including a metal foundry. There were no reports of casualties, but an electricity generator was struck, plunging the city into darkness.
Also on Monday morning a Hamas member was shot dead by Israeli forces in the West Bank city of Nablus. The man was wanted for organising suicide attacks, Israeli military sources said.
Tunnel attack
The Rafah border post operation was the deadliest against an Israeli target since the death of Palestinian leader Yasser Arafat in November.
Hamas said 1.5 metric tons of explosive were set off, while the Fatah Hawks said the tunnel had been 800 metres long.
Several buildings collapsed and others were damaged in the blast, that killed two soldiers instantly and trapped a third under rubble.
Afterwards, two gunmen stormed the post and killed two more solders before they were themselves killed.
The crossing - which is the only real outlet for Palestinians in Gaza to the outside world - will be closed until further notice, Israeli officials said.
Israel's Deputy Defence Minister Zeev Boim demanded the Palestinian authorities rein in militant groups if they wanted peace negotiations.
"Stopping terror is a pre-condition for any progress," he told Israeli army radio.
Hamas spokesman Mushir al-Masri said the crossing
symbolised the daily humiliation of the Palestinian people and attacks would continue "until we expel the occupation from our land".
A Fatah Hawks spokesman said the attack was in response to Arafat's "assassination". Many Palestinians believe Israel was behind his mystery illness.
The Fatah Hawks are an offshoot of the mainstream Fatah party.
Palestinian militants have used tunnels in the Rafah area to plant explosives a number of times in the past four years.
An Israeli soldier was killed last week after Hamas members tunnelled into a farm and detonated explosives as an Israeli patrol searched for weapons.
The West Bank and Gaza Strip have been occupied by Israel since 1967.
Israeli Prime Minister Ariel Sharon is planning to remove Israeli settlements and the soldiers that protect them from Gaza by the end of 2005.
Hamas has stepped up its attacks on Israeli targets in Gaza in an attempt to portray the pullout as a victory for armed resistance.