Mohammed al-Dahdouh was believed to be one of Islamic Jihad's top weapons makers.
The missiles were apparently fired from an unmanned aircraft into the city centre.
The attack destroyed the car al-Dahdouh was travelling in but also hit other vehicles travelling nearby.
Three members of the same family travelling in a taxi behind, a grandmother, mother and her four-year-old son were reported to be dead. The woman's daughter, aged seven, was critically wounded.
The Israeli Army has claimed responsibility for the attack and accused of al-Dahdouh of firing rockets into Israeli towns.
Al-Dahdouh's brother was killed two months ago in a car bomb.