The raid by more than 30 tanks and armoured troop carriers backed by helicopter gunships came as the moderate Palestinian prime minister-designate Mahmud Abbas clashed with Yasser Arafat (news - web sites) over his choice of internal security chief just three days ahead of a deadline to form a cabinet.
The Israeli armour met stiff resistance from gunmen in the town of Rafah, the scene of frequent clashes along the Israeli-controlled border with Egypt.
The Palestinian leadership slammed the deadly raid as a deliberate attempt to undermine a promised new peace push by the international community now that the Iraq (news - web sites) war is all but over.
And Palestinian militants responded by firing home-made Qassam rockets into southern Israel, hitting a building in Sderot and leaving one Israeli woman needing treatment for smoke inhalation.
The Israeli military said they had uncovered and destroyed two tunnels used for smuggling arms into the town, as well as the home of a local leader of the main Islamist movement Hamas accused of involvement in the smuggling.
Five Palestinians, including a teenager, were killed and 27 wounded, six of them critically, medics said.
One Israeli soldier filming for the army press office was killed and three injured, Israel said, adding that its incursion had met with "fierce resistance" from snipers who continued firing during the evacuation of the wounded.
The Israeli raid came after a day of clashes across the occupied territories as Israel celebrated the week-long Passover holiday.
In the northern West Bank city of Nablus a television cameraman for both Palestinian television and the US Associated Press Television Network, was shot dead Saturday. Eighteen others were injured in clashes he was filming when he was killed.
Israel said its troops had moved to arrest three Palestinians who were preparing to launch a suicide attack during the Passover.
A Palestinian gunman from Islamic Jihad was also killed after he opened fire on a Jewish settlement in the northern West Bank, slightly wounding two Israeli soldiers and seriously injuring a civilian who appeared to be a guard.
The Palestinian leadership lashed out at the upsurge of violence after a relative lull during the US-led war on Iraq.
The Israeli raid on Rafah was "aimed at sabotaging" a US pledge to publish a long-waited international roadmap for Middle East peace as soon as the Palestinian prime minister-designate has finalised his cabinet line-up.
The plan, which calls for the creation of a Palestinian state by 2005, has been repeatedly put on hold, first because of January elections in Israel and then because of the war in Iraq.
A moderate strongly favoured by Washington, Abbas has until Wednesday to finalize his government line-up.
But in a late hitch, Abbas stormed out of talks with Yasser Arafat late Saturday after the veteran Palestinian leader declined to approve his choice of internal security chief.
Mohmmad Dahlan, a former colonel in the security force tasked with preventing attacks on Israel, had quit his post last year after falling out with Arafat, who is accused by Israel and the United States of doing too little to fight "terrorism."
A member of Fatah (news - web sites)'s Central Committee, where the discussions on a new cabinet were being held, said Abbas had threatened to quit in protest at Arafat's refusal to name Dahlan as head of internal security.
Dahlan is expected to face down Palestinian militant groups who have rejected Abbas's proposal to suspend attacks for at least one year to give peace talks a chance of resuming.
That would include the Al-Aqsa Martyrs' Brigades, an ultra-hardline nationalist group linked to Arafat's own Fatah movement and which Israel has accused Fatah's West Bank leader, Marwan Barghuti, of heading. Barghuti has been on trial in Tel Aviv since last August.
Fatah officials said the discussion were to resume on Sunday, although it was not clear if Abbas would attend.
If he fails to announce a new cabinet by Wednesday, Arafat can name a new prime minister to carry out the task.
Israel has said it could ease the closure on the territories and pull back some of its troops from reoccupied territory if Abbas cracks down on militants.
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