Violence has flared between Israel and Gaza, a day after seven militants and an Israeli soldier were killed amid an undercover Israeli operation in Gaza.
Scores of rockets were launched at Israel, hitting an empty bus and seriously injuring a 19-year-old nearby, Israeli medics said.
Israel launched a series of air strikes in response. One Palestinian was killed, Palestinians reported.
A militant commander and an Israeli soldier were among the dead on Sunday.
Palestinians said an Israeli unit travelling in a civilian vehicle had killed the Hamas commander.
According to Palestinian sources, the Israeli unit was about 3km inside the Gaza Strip, which borders Israel, when militants from Hamas, which controls the Gaza Strip, stopped the car.
The group's military wing, the Izzedine al-Qassam Brigades, said the Israelis opened fire, killing a local commander, Nur Barakeh.
The incident is reported to have happened east of Khan Younis, in the south of the territory.
A gun battle erupted and Israeli tanks and aircraft opened fire in the area, witnesses said.
Six of the Palestinians killed belonged to Hamas and the seventh was a member of the militant Popular Resistance Committees, AFP news agency cited Palestinian officials as saying.
The Israel Defense Forces (IDF) said a member of the special unit involved was killed and another was lightly wounded.
In the wake of the clashes, Israeli Prime Minister Benjamin Netanyahu cut short his visit to Paris for events to mark the 100th anniversary of the end of World War One and returned to Israel, his office said.
Why did Israel kill the commander?
Due to the secrecy of the operation, Israel has not revealed specific details about the mission.
The IDF said though that the operation was "not intended to kill or abduct terrorists, but to strengthen Israeli security".
The BBC's Tom Bateman in Jerusalem says that according to a former Israeli general, the incident was likely to have been an intelligence-gathering operation that went wrong.
The exposure of such an operation by Israeli special forces inside Gaza would be extremely rare, he says.
What have both sides said?
Fawzi Barhoum, a spokesman for Hamas, denounced the incident as a "cowardly Israeli attack".
IDF chief Lt Gen Gadi Eisenkot said the Israeli unit had carried out "a very meaningful operation to Israel's security", without giving further details.
The Israeli military said that immediately after the clashes, 17 rockets were fired from Gaza into Israel, three of which were shot down.
Why are Israel and Hamas enemies?
Hamas won Palestinian elections in 2006 and reinforced its power in the Gaza Strip after ousting West Bank-based Palestinian President Mahmoud Abbas' rival Fatah faction in clashes the following year.
While Mr Abbas' umbrella Palestine Liberation Organisation (PLO) has signed peace accords with Israel, Hamas does not recognise Israel's right to exist and advocates the use of violence against it.
Israel, along with Egypt, has maintained a blockade of Gaza since about 2006 in order, they say, to stop attacks by militants.
Israel and Hamas have gone to war three times, and rocket-fire from Gaza and Israeli air strikes against militant targets are a regular occurrence.
Sunday night's incident comes after apparent progress in an Egyptian- and UN-brokered process to mediate after a series of escalations between the two sides in recent months.
More than 200 Palestinians in Gaza have been killed by Israeli forces since the end of March - most during weekly protests along the border at which thousands have expressed their support for the declared right of Palestinian refugees to return to their ancestral homes in what is now Israel.
Israel has said its soldiers have only opened fire in self-defence or on potential attackers trying to infiltrate its territory under the cover of the protests.
One Israeli soldier was killed on the Gaza-Israel border by a Palestinian sniper in July.