The Palestinian Islamist group Hamas says the head of its military wing, Ahmed Said Khalil al-Jabari, has been killed in an Israeli air strike.
Witnesses said he was travelling in a car in Gaza City when it exploded.
Israel's Shin Bet security service said Jabari was responsible for "all terrorist activities against Israel from Gaza" in the last decade.
Jabari is the most senior Hamas official to be killed in Gaza since an Israeli offensive four years ago.
In recent days, Israeli officials had said they were considering assassinating senior figures in Hamas, which governs the Gaza Strip, following a wave of heavy rocket-fire.
The Israeli military has already carried out retaliatory air strikes in Gaza.
Since Saturday, four Palestinian civilians and three militants, including Jabari, have been killed in Gaza, and dozens injured. Eight Israelis have also been hurt.
'Message to Hamas'
The BBC's Jon Donnison in Gaza City says the sound of gunfire echoed through the streets after Wednesday's air strike, which killed Jabari.
There are fears the attack could lead to another war, he adds.
Jabari's bodyguard, who was in the car with the commander of the Izz al-Din al-Qassam Brigades, is also believed to have died. Earlier reports said it was his deputy.
Shin Bet quickly confirmed the strike, saying in a statement that Jabari had been "eliminated as a result of a joint operation with the Israeli military.
"He was the senior commander of the Hamas military wing in the Gaza Strip. As part of his status and activity, Jabari was responsible in the last decade for all terrorist activities against Israel from Gaza," it said.
"Jabari was responsible for financing and directing military operations and attacks against Israel. His elimination today is a message to Hamas officials in Gaza that if they continue promoting terrorism against Israel, they will be hurt."
Our correspondent says Jabari, 46, was one of Hamas's most senior figures.