There was no immediate claim of responsibility. The attack was condemned by Palestinian officials who said those killed were members of a U.S. monitoring team sent to the region to supervise implementation of a U.S.-backed peace plan.
Wednesday's attack could deal a major blow to Palestinian efforts to bring more international monitors to the region.
The blast went off around 10:15 a.m. Wednesday as a three-car U.S. diplomatic convoy with a Palestinian police escort drove near a gas station on the outskirts of the town of Beit Lahiya in the northern Gaza Strip, along the main north-south road. Israeli reports said the U.S. cars were armored.
U.S. diplomatic sources said the people in the car were security guards for the U.S. diplomats traveling in the other vehicles. In Washington, State Department officials declined to comment.
Israeli radio reports said CIA officials were traveling in the convoy. Palestinian officials said the diplomats were U.S. monitors. Some of the monitors are from the CIA.
The explosion apparently a remote-control roadside bomb. The blast tore the van in half and left the wreckage twisted with the tires up in the air. The pavement was stained with blood and littered with bits of flesh.
An AP reporter saw a gray wire with an on-off switch leading from the scene of the attack to a small concrete room at the side of the road.
Palestinian militants have attacked Israeli army and settler convoys in Gaza repeatedly in the past three years of fighting, both with bombs and gunfire. Islamic militants, responsible for the bulk of the attacks, have said in the past they have no interest in "exporting" the conflict by taking aim at non-Israeli targets.
Mohammed Radwan, a Palestinian taxi driver, said he was at the gas station when the blast went off.
"I was about to fill up my car with gas when I saw the American convoy passing," Radwan said. "There was a Palestinian police car in front and then three big (U.S.) cars. When the third one passed, an explosion went off."
"The first two cars drove quickly and stopped far form the explosion. Palestinian security people jumped out of the car and rushed to the car that had blown up. When I tried to approach them, they shouted at me to leave. I saw two people covered with blood lying next to the car."
The wounded man was initially treated at a Gaza hospital and was awaiting transfer to Soroka Hospital in the Israeli town of Beersheba.
Palestinian Prime Minister Ahmed Qureia denounced the attack. "We strongly condemn this incident and we will conduct an investigation and we will follow it to find the source of this attack," he told reporters in the West Bank.
Cabinet minister Saeb Erekat suggested the blast would undercut the long-standing Palestinian plea for international supervision in the West Bank and Gaza. "These are American monitors that have come here at our request," Erekat said. "These people were here to help us."
Israeli officials said the attack underscored the need to dismantle Palestinian militant groups — a requirement of the stalled, U.S.-backed "road map" peace plan that Palestinian leaders have refused to carry out.
"What happened is evidence that no one is immune, unfortunately, to Palestinian terrorism, even when we are talking about the representatives of…the United States, whose entire goal was and remains to advance a peace agreement between the sides," said Zalman Shoval, an adviser to Prime Minister Ariel Sharon.
Several hours after the bombing, U.S. investigators were attacked by Palestinian stone throwers and sped away as their cars were pelted by rocks.
A statement posted on the U.S. embassy's Web site after the attack said Americans should leave the Gaza Strip.
"The United States government recommends that all U.S. citizens depart the area as expeditiously as possible, while avoiding the area of the attack," the statement read. "We are asking the Israeli government to facilitate the evacuation of any American citizen wishing to leave the Gaza Strip."
The announcement also asked American citizens in the West Bank to take precautions against possible further attacks.
The explosion came hours after the United States vetoed a U.N. Security Council resolution that would have condemned Israel for building a barrier that cuts into the West Bank.
The United States had sought an alternate draft that would have called on all parties in the Middle East work to dismantle terrorist groups. But Syria, which introduced the draft, went ahead with Tuesday's vote anyway.
Palestinian leader Yasser Arafat also said he has protested to the United Nations after Israel's military ordered the expulsion of 15 Palestinian detainees from the West Bank to Gaza, charging they were accomplices to violence.
The military said expulsion orders issued Tuesday were the only way to be sure the detainees would not return to terror activity. The military said most of them are members of Hamas and Islamic Jihad militant groups.
None participated directly in attacks on Israelis or had "blood on their hands," an army statement said, but all were accomplices to violence. The detainees have two days to appeal the orders. They have already been moved to an army jail near the Gaza Strip.
In the past, the military said expulsion was a form of deterrence by hitting at relatives of militants, but a September 2002 ruling, Israel's Supreme Court severely limited the practice to only those directly involved in violence.
Even with the court's limitations, human rights groups say the practice violates international law.