Hamas said the incident began when assailants in a passing car opened fire on a group of its fighters, killing one of its commanders. Hamas gunmen gave chase as the car sped back towards the border with Israel, Hamas said in a statement.
Later on, Israeli aircraft fired more than 40 missiles in the area, according to witnesses.
Medics and Hamas officials said at least seven people were killed, four of them their fighters, including Hamas commander Nour Baraka.
Violence has flared frequently on the frontier since Palestinians began weekly protests on March 30. Egypt, Qatar and the United Nations have been trying to broker a long-term ceasefire.
AFP reports: An exchange of fire erupted during an Israeli military operation in the Gaza Strip on Sunday, killing six Palestinians and an Israeli soldier.
As tensions rose following the clash, Israeli Prime Minister Benjamin Netanyahu’s office said he would cut short his trip to Paris, where he had been attending World War I commemorations, and return home.
Fawzi Barhoum, a spokesman for Hamas movement that runs the blockaded Gaza Strip, denounced a “cowardly Israeli attack”.
Palestinian security sources said the clash included Israeli air strikes.
Gaza’s health ministry said six Palestinians were killed.
The dead included a local commander for Hamas’s armed wing, the Ezzedine al-Qassam Brigades, the brigades said in a statement. He was identified as Nour Baraka.