Residents of Gaza City have been jittery in the past week, after Israeli helicopters launched three missile attacks that killed seven Hamas activists and a bystander.
However, some Israeli observers suggested that it had the hallmarks of a "work accident" — terrorists building a bomb that exploded prematurely.
Earlier Wednesday, Palestinian leaders criticized Israel for its series of strikes against Palestinian militants, saying they will bring only revenge and more bloodshed.
Following a botched Israeli missile attack on Tuesday that killed one bystander and wounded 26, Palestinian Prime Minister Mahmoud Abbas accused Israel of undermining limited Palestinian efforts to rein in the militants.
"This brutal Israeli government policy will only take us back to the vicious cycle of violence," Abbas said in a statement. "Israel must understand there is no military solution to the Palestinian-Israeli conflict."
Israel has said every Hamas militant is a potential target for "liquidation" — a response to a Hamas suicide attack on Aug. 19 that killed 21 people on a Jerusalem bus.
The spiraling violence has dimmed the prospects for a U.S.-backed "road map" peace plan and highlighted the reluctance of Abbas to confront militant groups like Hamas and the Islamic Jihad.
In Tuesday's botched attack, an Israeli helicopter fired three missiles at a car stuck in a traffic jam on a residential street just north of Gaza City. Three Hamas members were able to flee their car before missiles struck it, witnesses said. Doctors said a 65-year-old water-pipe vendor was killed and 26 other bystanders were wounded, including five children.
It was the third Israeli missile strike in five days.
Shadi Tayan, who owns a bookstore in the area, said "the people in the car jumped out and ran in two different directions" after one rocket hit near the front of the white car. After the men fled, two more missiles hit.
Hamas sources said the car was carrying three of its men, including Khaled Masoud, the brother of a Hamas military wing commander killed in an Israeli raid in Gaza three months ago.
The sources said Masoud was wounded in the shoulder and face and was recovering after treatment in a private clinic.
An Israeli security official said Masoud was responsible for building crude rockets of the type regularly fired into Israel and Jewish settlements in Gaza — almost invariably missing their targets.
The official, speaking on condition of anonymity, said Israel would continue its drive against Hamas and other militant groups and expressed "sorrow" for the death of civilians.
The victim, Hassan Hamlawi, had been sitting outside his water-pipe shop when the missiles hit nearby. Crowds gathered at the scene, chanting "Revenge, revenge!"
Palestinian Health Minister Kamal Shirafi said four of the wounded were in critical condition, including an 8-year-old girl.
The Gaza operation came hours after Israeli soldiers snatched two wounded Palestinians, one involved in a suicide bombing, from their hospital beds in the West Bank, where Israeli troops have stepped up their search for fugitives.
In the wake of the bus bombing, one of the worst suicide attacks in three years of fighting, Israel says it has no choice but to hunt down militants. Officials denounce Palestinian leaders for failing to dismantle the armed groups — a key requirement of the peace plan supposed to lead to Palestinian statehood by 2005.
Abbas, frustrated by the unwillingness of Yasser Arafat to yield control of Palestinian security forces, has balked at confronting the militants for fear of civil war.
Palestinian security chief Mohammed Dahlan said Israel must stop its strikes if it "wants to reverse the situation back to the way it was a week ago."
"The policy of assassination will bring only revenge and the continuation of the cycle of violence," Dahlan said.
The U.S. government reiterated its call for Arafat to loosen his grip.
"The security forces need to be consolidated under Prime Minister Abbas and Dahlan," White House spokeswoman Claire Buchan said Tuesday.
CBC News Correspondent Robert Berger reports Arafat says he's ready to take action against Palestinian militant groups if Israel halts missile strikes and other attacks against them.
At the same time, Arafat said he would not risk a Palestinian civil war.
Israeli officials reacted skeptically. They say Arafat is encouraging terrorism, and they say, terrorist leaders planning attacks on Israelis will continue to be targeted.
"Clearly, by blocking the consolidation…Arafat undercuts the fight against terrorism and further undermines the hope of the Palestinian people for peace and a Palestinian state," she said.
Also Tuesday, New York Mayor Michael Bloomberg visited survivors of last week's suicide bombing and lit a candle at the spot where the blast tore apart a bus.
"When somebody has a gun to your head, you can't negotiate," Bloomberg said at a hospital where he met injured survivors. "You have to stand up and fight back."
Bloomberg then went to the Western Wall, Judaism's holiest site, and took a bus along the No. 2 route on which the bomber struck.
The missile strikes have forced Hamas members into hiding. Hamas leaders were conspicuously absent from funerals Monday for four men killed Sunday on Gaza's beach front.
Leaflets hung in mosques throughout the Gaza Strip instructed Hamas activists to take precautions — such as not traveling in groups, avoiding use of their telephones, using makeup to disguise themselves and staying off main streets.
Separately, an Israeli soldier on Wednesday shot and killed a Palestinian man near the Gilo checkpoint south of Jerusalem on the road from Bethlehem as the man ran toward the soldier brandishing a knife, the army said.
Israeli forces withdrew from Bethlehem nearly two months ago with the expectation that Palestinian security forces would retake security control.