The army declined comment on reports that several soldiers were killed in the attack, for which Hamas and the Al Aqsa Martyrs' Brigades claimed responsibility. The groups said they were avenging leaders killed by Israel in recent weeks, including seven shot dead Saturday in the West Bank.
The carefully orchestrated attack came as Egypt was trying to broker a cease-fire between Israel and the militants ahead of a planned Israeli withdrawal from Gaza. It seemed unlikely the blast would disrupt a pullback. Israeli Prime Minister Ariel Sharon has said he's determined to go ahead with a plan he believes is crucial for Israel's security.
As Israeli ambulances evacuated the wounded Sunday, Palestinian militants kept firing at the outpost, drawing heavy Israeli return fire from machine guns and tanks, witnesses said. In a nearly Palestinian village, a police officer and a 15-year-old boy were killed by Israeli fire, medics said.
The blast went off shortly before 10 p.m. at an army outpost at the Gush Katif junction, near Gaza's largest bloc of Israeli settlements. The outpost is protected by reinforced concrete.
Militants said they dug a 1,000-foot tunnel to reach the outpost and detonated about 330 pounds of explosives.
In a call to The Associated Press, Hamas and Al Aqsa, a violent group with ties to Yasser Arafat's Fatah movement, claimed responsibility.
"This is a message to Sharon that ... our fighters will continue the holy struggle until we uproot them (Israelis) from our land," said the spokesman, who only gave his name as Abu Mohammed.
Hamas said the explosion came as revenge for Israel's assassination of the group's founder, Sheik Ahmed Yassin, in March, and of his successor, Abdel Aziz Rantisi, a month later.
In Gaza City, about 2,000 people rushed into the streets to celebrate, among them about 100 armed men.
The Arab satellite TV station Al Jazeera reported that five Israeli soldiers were killed in the Gaza blast. Israel's military censor does not permit reporting on the deaths of soldiers until families have been notified. However, security officials suggested Al Jazeera's figure was too high.
Brig. Gen. Shmuel Zakai, an Israeli army commander in Gaza, noted that it must have taken weeks to dig the tunnel. He said the base was targeted in the past, including by a car bomb.
Earlier, in the West Bank, militants threatened revenge for seven armed men killed by Israel on Saturuday in the city of Nablus.
Nayef Abu Sharkh, 45, the West Bank's top fugitive and an Al Aqsa founder, was among those killed when soldiers hurled grenades into an underground hideout in Nablus' old city.
The army withdrew from Nablus on Sunday, after four days of searches. The fugitives killed, among them also several from Hamas and Islamic Jihad, had been the main targets of the operation.
Al Aqsa acknowledged that it suffered a setback. Abu Sharkh's death "was a great loss for us, and it will take us some time to get over it," said an Al Aqsa spokesman, who only identified himself as Abu Mahmoud.
At Sunday's funerals, about 20,000 people, including militants from all three groups, marched through the city, chanting "revenge, revenge."
Egypt has invited the militants, including Al Aqsa, to Cairo in September for a truce declaration. Egypt has also asked Israel to halt military strikes in Gaza once Egyptian security advisers are deployed there later this year.
Israel has said it cannot make such a blanket promise. Militant groups, meanwhile, have shown interest in the Egyptian proposal, but have not committed to a truce. Similar talks have failed in the past, though there's more at stake this time — a possible role for the militants in running Gaza.
Among Palestinians, the killing of Abu Sharkh and the other six militants drew a mixed response. Residents of the West Bank's largest city have complained bitterly about the gunmen, who have waged battles in the streets to settle personal disputes, sometimes killing bystanders.
Palestinian Prime Minister Ahmed Qureia called the raid a "criminal barbaric act," even as some of the Al Aqsa gunmen called Qureia a "cockroach" in apparent frustration over his inability to stop the army.
Israel said Abu Sharkh was behind numerous attacks, including two suicide bombings that killed 25 people in 2002 and 2003. However, Al Aqsa members said he opposed some of the recent actions of militia members, such as recruiting teens from the city for suicide bombings.
During Israel's weekend raid, Abu Sharkh and the other six militants were hiding in a system of tunnels under the old city, or Casbah. At one point Saturday, Abu Sharkh and another man emerged to make tea in an old two-story stone house sitting on one of the tunnel exits.
The two were spotted by Israeli soldiers who opened fire, residents said. The other man was killed on the spot and Abu Sharkh was wounded in the hand, then slipped back into the tunnel. Soldiers searched for other exits and fired bullets and grenades into them, killing the men in the tunnel.