Israel evacuated its wounded by helicopter
Israel and Jordan signed a peace treaty in 1994, only the second between Israel and a Arab state.
In a separate development, the militant Palestinian group Islamic Jihad has said it will stop all military operations against Israel, the French news agency AFP reports.
Nafez Azzam, a high-ranking Islamic Jihad official, said the group was following the example of its larger rival Hamas, and acting "in line with Palestinian unity, which stipulates the end of military operations against Israel".
The Palestinian leader, Yasser Arafat, has called for an end to attacks on Israel.
Jordan skirmish
The BBC's Caroline Hawley in Jerusalem says a major military operation is still under way as Israel searches for possible other gunmen who may be hiding.
Helicopters and special forces have been deployed in the search. The incident took place near the Beit Shean Valley, south of the town of Tiberias.
An Israeli army officer told army radio that his forces had pursued the attackers.
"We got a search party together and went in there to flush out the terrorists," he said.
The violence followed mounting Palestinian anger at Israel's decision to stop Mr Arafat from attending a symbolic Christmas Eve Mass in the West Bank town of Bethlehem.
A seat at the church was draped with the Palestinian leader's head-dress to mark his absence from the service, which he has attended since Bethlehem was handed over to the Palestinian Authority in 1995.
But despite the tension in Bethlehem, the Israeli army is reported to have lifted its blockade of the West Bank city of Jericho.
Jordan link
A Jordanian Cabinet minister denied that Israeli troops had entered Jordan, and Israel said the bodies of the two gunmen were found on the Israeli side of the border.
The dead gunmen were carrying hunting rifles, our correspondent says.
Jordan said there was no proof that Tuesday's gunmen came from the kingdom.
In a separate incident inside the West Bank, about 20 Israeli tanks and military vehicles entered the town of Tamoun, near Nablus, early on Tuesday.
Palestinian security officials said the Israelis went to arrest members of the militant Palestinian group Hamas and then withdrew.
The Israeli army said seven suspected militants were arrested as part of efforts to "act against the terror infrastructure".