Gunmen fired into the air as a bulldozer bashed through a concrete barrier near the Rafah border crossing on Wednesday, which had been earlier forced closed by followers of the Al-Aqsa Martyrs Brigades, an offshoot of the ruling Fatah faction.
Dozens of mainly teenagers then rushed through the breach in the wall but were unable to cross beyond a swath of barbed wire, behind which were stationed Egyptian border guards, witnesses said.
An Egyptian security official said as many as 300 Palestinians crossed into Egypt.
Witnesses said up to 1,000 Palestinians rushed into Egypt while dozens of Egyptians, mainly women, passed into Gaza.
An armoured vehicle was set on fire and at least three Palestinians were injured, one seriously.
The attack on the Rafah border, Gaza's only link with the outside world avoiding Israel, was part of a series of protests designed to secure the release of a local Al-Aqsa leader, Alaa al-Hams, arrested on Tuesday over the kidnapping of three Britons.
British rights activist Kate Burton and her parents were abducted in Rafah on December 28 but released unharmed early on Saturday.
As well as taking over the governor's headquarters in Rafah, gunmen also raided the town's courthouse and central post office and blocked a road leading to the Rafah terminal.
Militants also attempted to kidnap the parents of American peace activist, Rachel Corrie, who was killed by an Israeli bulldozer in Rafah in 2003 and is regarded as a heroine by Palestinians.
Craig and Cindy Corrie were nearly abducted on Tuesday night from the home of a friend who managed to dissuade the gunmen by telling them about the background of his guests.
It’s believed the gunmen wanted to kidnap the Americans to use as bargaining chips to secure the release of al-Hams.
Rising lawlessness
Palestinian Interior Minister Nasr Yussef convened an emergency meeting of security officials in Rafah in a bid to halt the chaos, vowing to confiscate the weapons of militants in the run-up to January 25 parliamentary elections, but he appeared powerless to halt the descent into lawlessness.
Senior members of Fatah acknowledged that the security chaos in Gaza was undermining the movement's election prospects, as faces its first real challenge from the radical Islamist movement Hamas.
Mohammed Horani, a Fatah candidate in the West Bank city of Hebron, expressed fears about the electoral fallout from the chaos.
"Of course these reprehensible acts will affect Fatah's chances. These people seem to be trying to destroy the regime by kidnapping people who are friends of the Palestinians," he said.
Palestinian chief negotiator Saeb Erakat, standing as Fatah candidate in the West Bank town of Jericho, also acknowledged the chaos would damage Fatah's standing.
"I am sure that there will be some damage but, all in all, people understand that Fatah has called the elections ... as a way to restore law and order," he said.
Palestinian leader Mahmoud Abbas has repeatedly pledged to address the security mess in Gaza.
However, the situation has worsened in recent weeks with kidnappings and shootouts between militants and security forces a near daily occurrence.
Hamas talks 'possible'
Meanwhile Israeli Defence Minister Shaul Mofaz said Israel was ready to open talks with Hamas if it wins the Palestinian general election as long as it lays down weapons.
Israel has in the past steadfastly refused to meet representatives of the group, which has carried out the majority of attacks during the five-year Palestinian uprising and still refuses to recognise Israel’s right to exist.
But with Hamas fielding candidates for the first time, Mr Mofaz indicated that a meeting was possible.
"Israel is prepared to have negotiations with Hamas if it wins the elections and if it announces that it has disarmed," army radio reported the minister as saying.
A spokeswoman for Mr Mofaz's office did not confirm the comments attributed to the minister, but said in a statement: "The only way in which Israel would consider dialogue with Hamas would be if it disarmed, retracted its declarations that deny Israel's right to exist and became a legitimate political movement that does not operate against the state of Israel."
Israeli officials and the army have been holding talks in recent days about how to prepare for a possible Hamas victory.
Despite being behind the bulk of attacks since the Palestinian uprising erupted in September 2000, Hamas has not claimed responsibility for any attacks in the past 12 months.
The latest polls show Hamas is around 10 percent behind the governing Fatah faction.