Tensions have been mounting in Gaza in recent days after Israeli tanks briefly advanced into Gaza, after the deaths of two Israeli soldiers and two Palestinian terrorists.
The tanks have now withdrawn from the southern town of Khan Yunis in the Gaza strip.
The Israeli army attacked after explosives were apparently planted by two Gazan terrorists on the border of Israel. Reports also suggested that the terrorists were attempting to capture an Israeli soldier.
The two soldiers killed were named by Haaretz newspaper as Eliraz Peretz, 31, who was an officer, and 21-year-old Ilan Sebiatkovsky.
The clashes are the worst for more than a year; no Israeli soldier has been killed since the Gaza offensive in December 2009.
Prime Minister Binyamin Netanyahu said that Israel would give a "firm and decisive response to any attack”.