An Israeli soldier and a Palestinian militant have died in a shootout near the border with the Gaza Strip.
The militant infiltrated into Israel in the early hours, the military said. The incident touched off fresh violence in the volatile border area, which has been largely quiet since March.
The exchange began after the militant cut through the fence separating the Hamas-run Gaza Strip and southern Israel.
Later, Israel said two rockets landed in southern Israel, causing no damage or injuries.
A Gaza official said three people were seriously wounded when an Israeli airstrike targeted their vehicle.
The clash raises concerns of a new Israel-Gaza flare-up.
No group took responsibility for the infiltration but in a text message, a group from Gaza, the Islamic Jihad, welcomed the attack. It identified the militant as Ahmad Nassar and called him a "martyr who has carried out the heroic attack".
Residents of southern Gaza said they heard gunfire in the early hours and Israeli helicopters circling in the air. They also said tank shells fired into Gaza set fire to their fields.
Israeli officials said air and ground forces were firing warning shots toward open areas in southern Gaza.
Israel's border with Gaza has been relatively quiet since a three week war launched in December 2008 against the militant Hamas group, which rules the coastal strip.
The last major deadly incident along the Gaza border took place in March 2010, when two Israeli soldiers were killed in clashes. Israel's military also launches airstrikes in response to rocket fire by militants.
The last round of violence in March took place after Israel killed a militant leader, setting off four days of rocket barrages from Palestinian militants and airstrikes by the Israeli military.
That left at least 24 Palestinians dead and disrupted the lives of about one million Israelis living in rocket range.
Hamas stayed out of the fighting in March, letting militants from the Islamic Jihad and Popular Resistance Committees carry out the attacks on Israel.