Separately, a 9-year-old Palestinian boy was shot and killed at the funeral of two men killed in the Gaza Strip raid.
Palestinian doctors said mourners fired in the air, as is customary during funerals, and drew Israeli army fire, apparently because the cemetery is near a Jewish settlement. The Doctors said the boy was hit by large-caliber ammunition fired by Israeli machine guns. Two adults at the funeral were also injured. The Israeli army denied that soldiers opened fire during the funeral.
The raid on Khan Younis came as part of an Israel military offensive in Gaza, triggered by a Hamas attack two weeks ago on an Israeli tank that killed the four-man crew. Since then, Israeli troops have repeatedly entered Gaza towns, demolishing the homes of suspected militants.
The latest military operation came hours after Palestinian officials agreed to convene the Palestinian Legislative Council next week and begin the process of appointing a prime minister, one of the reforms Israel and the United States demand as a precursor to the renewal of peace talks.
Mideast mediators have pressured Arafat to share power as part of reforms required as part of a U.S.-backed plan for Palestinian statehood by 2005.
Raanan Gissin, an adviser to Israeli Prime Minister Ariel Sharon, said Sunday that Israel is reviewing the names of the 124 Central Council members and 88 legislators and would deny permits to those directly involved in attacks against Israel.
In the Khan Younis raid, tanks backed by attack helicopters entered the southern Gaza town before dawn and withdrew several hours later.
Israeli forces met fierce resistance, the military said. Firefights erupted with gunmen who used a school, a hospital and a mosque as cover when firing on troops, the army said.
In one incident, several gunmen were seen crawling on the floor of the emergency room in the town's Nasser Hospital as shots were heard outside. Witnesses said the gunmen were not firing from the hospital, but were pinned down by Israeli fire as they accompanied wounded friends.
Israeli troops also tore down a retaining wall in another section of the hospital.
"The occupation army didn't show any respect to our medical teams and they fired on ambulances and attacked the hospital too," said Dr. Haidar Kidera, director of Nasser Hospital said.
Israeli Col. Pinchas Zoaretz, the commander of the operation, denied his troops entered hospital grounds, saying soldiers were forced to enter the courtyard of an adjacent school after militants detonated a bomb near an armored vehicle, sending it flying into school grounds. Troops entered the schoolyard to rescue the vehicle, he said.
"They are trying to create spin in the media that we attacked a hospital but this never happened," he said.
During the raid, Palestinians planted bombs and fired anti-tank missiles at the troops, residents said A 50-year-old man was shot and killed while watching the fighting from his apartment. A 27-year-old Palestinian gunman was also killed. Thirty-five Palestinians and two Israeli soldiers were wounded.
Khan Younis was targeted, in part, because a Palestinian sniper killed an Israeli soldier there on Feb. 23, said Zoaretz. He said the raid was also meant to demolish buildings and structures militants use to fire mortar bombs and Qassam missiles at Israeli towns and settlements.
"We also want to continue putting pressure on the terrorist organizations...to create a situation in which we are on the offensive and they are on the defensive," Zoaretz said.
Troops demolished an eight-story apartment building that gunmen had used 14 times in the past four months as a firing position, the army said. Several abandoned structures used by gunmen were also torn down, the army said. Palestinians said 85 tenants were made homeless.
After daybreak, residents of the apartment building rummaged through the rubble, searching for their belongings. Several damaged ambulances stood in the streets, evidence of the fierce fighting that had rocked the town.
The owner of the apartment building, Mohammed Akher, 42, said the raid would only lead to further conflict. "If they thought that destroying and killing people will bring security and calm they are mistaken. It will increase the bloody cycle of violence and violence will bring more violence," said Akher.
The militant Hamas group vowed to retaliate. "This battle of honor will continue until we uproot the occupation from our land and our people will avenge the killing and the aggression against Khan Younis and everywhere, " said Hamas spokesman Abdel Aziz Rantisi.
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