Palestinian sources say there has been fighting near Khan Younis in southern Gaza, with people fleeing their homes.
The incursion follows a bomb attack which killed one Israeli soldier and wounded three near the Gaza border.
It is the worst violence since Israel's offensive against Hamas in Gaza ended with both sides declaring ceasefires.
An Israeli soldier was killed by an explosive device planted on its side of the border near the Kissufim crossing, prompting troops to opened fire into Gaza.
A farmer was killed, Palestinian officials said.
There is now heavy fighting going on in Khan Younis, south of the Kissufim crossing.
Palestinian sources say 20 Israeli tanks and seven army bulldozers have made an incursion.
Two people were also wounded in an Israeli air strike in Khan Younis.
Hospital sources say one was a member of Hamas' Popular Resistance Committee who was on a motorbike at the time, and the other was a passer-by.
Israel has closed border crossings into Gaza because of the attack on the patrol, Israeli officials said, stopping the flow of aid supplies to Gaza's 1.5 million residents.
Aid agencies have been struggling to meet the urgent needs of tens of thousands of displaced, homeless and injured people in Gaza.
US visit
The fresh violence comes as US President Barack Obama's Middle East envoy, George Mitchell, arrives in the region to seek a more permanent truce.
He will hold talks with Egyptian officials, who have been mediating between Israel and Hamas, before travelling on to Jerusalem and Ramallah.
In Washington, Secretary of State Hillary Clinton said the US supported "Israel's right to self-defense".
"The rocket barrages which are getting closer and closer to populated areas (in Israel) cannot go unanswered," she said in her first news conference at the State Department.
Israel and Hamas declared separate ceasefires on 17 and 18 January, ending an Israeli offensive in which nearly 1,300 Palestinians and 10 Israeli soldiers were killed. Three Israeli civilians were killed by rocket fire from Gaza in the same period.
Israel said its objective to stop militant rocket fire into Israel had been fulfilled.
When Hamas called its ceasefire, it said Israel had one week to fully open all the crossings into Gaza, in order to end an 18-month blockade of the territory that has crippled its economy.
Israel wants guarantees that Hamas militants will not re-arm via smuggling tunnels under the border with Egypt.
source:BBC
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