GettyDozens of people have been killed or injured in a blast at a refugee camp in the Rafah area, the Hamas-run health ministry in Gaza has said.
Videos from the scene in the southern Gaza Strip showed a large explosion and intense fires burning.
The Israel Defense Forces (IDF) said it had targeted two senior Hamas leaders at one of the group's compounds and would review reports fire had spread to shelters, harming civilians.
Hours earlier, Hamas had fired eight rockets from Rafah towards Tel Aviv, the first long-range attacks on the city since January.
The strike on Rafah came two days after the International Court of Justice ordered Israel to immediately halt its military operation in Rafah, where hundreds of thousands of civilians are still sheltering.
In a statement released after the blast inside Gaza on Sunday night, the IDF said it had "eliminated" two senior Hamas figures - Yassin Rabia and Khaled Nagar - in a "precise" air strike "in north-west Rafah".
The IDF said it had targeted Hamas militants with precision weapons.
Hamas-run authorities said 35 people had been killed and dozens injured at a camp for displaced Palestinians north-west of Rafah, away from recent military operations in a designated humanitarian safe zone.
It said women and children are among the dead.
GettyThe death toll was likely to rise as search and rescue efforts continued in Rafah’s Tal al-Sultan neighbourhood about 2 km (1.2 miles) north-west of the city centre, a Palestinian Red Crescent Society spokesperson quoted by the Associated Press news agency said.
An eyewitness told Reuters news agency the whole neighbourhood in Tal Al-Sultan had been "burnt".
Another witness, Fadi Dukhan, described sitting at the door of a house when he heard an explosion.
"Suddenly we heard the sound of a missile," he told Reuters. "We ran and found the street covered in smoke. We did not see anything."
Entering a house, he added, he did not find anyone inside but later found "a girl and a young man who had been cut into pieces".
ReutersEarlier on Sunday air raid sirens sounded around Tel Aviv as central Israel came under attack by Hamas rockets, fired from close to Rafah.
The eight rockets were either intercepted by air defence systems or fell in fields.
Israel’s military offensive has continued in Rafah, despite the International Court of Justice ruling on Friday that it must halt.
The rocket barrage highlights the threat Hamas still poses to people across Israel, although there were no reports of injuries.
It also illustrates the challenges the Israeli army faces as it moves further into southern Gaza to oust Hamas from what it calls its “last major stronghold”.
Getty ImagesThe military wing of Hamas said it had acted in response to "the massacre of civilians".
The rocket attack came ahead of further ceasefire negotiations between Israel and Hamas, which are expected to resume next week.
Israel began a long-anticipated offensive in Rafah about three weeks ago, vowing to destroy the remaining Hamas battalions there.
It believes Israeli hostages are also being held in the town.
More than 800,000 Palestinians have fled from Rafah since the offensive began, according to the UN.
Earlier in May, around 100,000 people were ordered by the IDF to evacuate the city and told to head further north in Gaza.
About 1.5 million people had been sheltering there from the fighting elsewhere in Gaza.
Israel's military campaign in Gaza began after Hamas-led gunmen attacked Israel on 7 October, killing about 1,200 people and taking 252 others back to Gaza as hostages.
Nearly 36,000 Palestinians have been killed in the war since then, according to Gaza's Hamas-run health ministry.