An Israeli military spokesman confirmed the raid, saying it targeted an Islamic Jihad leader responsible for a number of rocket attacks on Israel.
The trio is believed to have belonged to the Al-Quds Brigades, a branch of Islamic Jihad.
The names of the victims are Said Abu el-Jidian, an official of Jihad's armed wing, activist Akram Kaddass, and Mohammed Abed.
Palestinian interior ministry spokesman Tawfik Abu Hussa condemned the attack, warning raids "do not contribute to Palestinian efforts to establish a new truce."
The blast occurred in a border area from which Israel had banned Palestinians to prevent rocket attacks aimed at Israel.
An Israeli military spokesman said, two rockets fired from Gaza earlier on Monday crashed across the border in southern Israel but caused no injury or damage.
Meanwhile Palestinian police have clashed with gunmen believed to be from a faction of the ruling Fatah movement.
Witnesses say police gave chase after the gunmen hijacked two police vehicles.
The reason for the clash was not immediately clear and there was no reports of casualties.
Earlier, police smashed up government offices in a protest over lawlessness.
EU undeterred
Despite the ongoing violence and recent kidnappings, monitors from the European Union have continued to fan out across Palestinian territories ahead of this month’s elections.
In the past week in the Gaza Strip, three Britons and an Italian were kidnapped in separate incidents but all were later released.
Thirty-six EU monitors are currently heading to cities in the West Bank and in Gaza, with as many as 200 to be in place when Palestinians go to the polls on January 25.
Ballot may be delayed
Palestinian leader Mahmoud Abbas has said the ballot may be delayed if Israel barred Palestinians voting in Arab East Jerusalem.
"We are all in agreement that Jerusalem has to be included in the election," Mr Abbas told Al Jazeera television during a visit to Qatar.
"And if is not included, all the factions agree that there will be no elections," Mr Abbas said.
However, a Hamas spokesman in the Gaza Strip has denied agreeing to a postponement.
The militant group, sworn to destroying Israel, has seized upon the current internal disputes within the Fatah party.
"Our role as Palestinian parties is to exert effort to remove the obstacles, not to take them as pretext to delay the elections," spokesman Sami Abu Zuhri said.
Voting was allowed in Jerusalem during the last parliamentary ballot in 1996 but Israel has banned it this time around because it opposes the participation of Hamas.