Youssef Abu Dakka, a member of Hamas, was killed and four other activists wounded by shrapnel from a shell fired by an Israeli tank at Abassan near Khan Yunes.
Younis Abu Dakka, a brother of the dead man and an important local Hamas figure, was arrested during the operation.
According to medical sources the soldiers arrived in around 20 armoured vehicles and returned immediately afterwards to the nearby Israeli territory.
An Israeli military source said the soldiers encircled the house where Younis Abu Dakka was hiding out and Palestinians opened fire on them from the roof of a neighbouring house.
A helicopter gunship fired a missile, killing one and wounding four, he said.
Meanwhile, a member of Islamic Jihad was killed by Israeli fire near Kissufim, between the Gaza Strip and Israel, according to a medical source.
17 year old Mustapha Mansur was killed by shrapnel from a tank shell and bullets, while another Palestinian was wounded.
An Israeli military spokesman confirmed that two Palestinians were wounded by Israeli fire overnight.
"The two Palestinian suspects were lurking near the security barrier" separating the Gaza Strip from Israel, he said.
At least 185 Palestinians and one Israeli soldier have died in the intensive Israeli military operations launched on June 28 to retrieve Gilad Shalit, a soldier kidnapped on June 25, and to end the firing of Palestinian rockets at southern Israel.
As part of its offensive, Israel has detained dozens of top Hamas officials, including cabinet members and MPs in the occupied West Bank.