Meanwhile, CBS News Correspondent Robert Berger reports Israel is rejecting the U.N. General Assembly's overwhelming approval of a resolution demanding Israel tear down its security fence in the West Bank.
Israel vows it will continue construction of the barrier despite the resolution. Government spokesman Dore Gold told Berger the fence is necessary "to stop the constant efforts of terrorist groups to infiltrate Israel and kill our civilians."
Palestinian officials described the resolution as a victory for peace. They said the way to peace is not through walls, but through negotiations.
The Israeli military and Palestinian witnesses offered conflicting versions of the strike in Gaza. Palestinians said Tuesday that the seven dead, including an 11-year-old boy, were all civilians killed by an Israeli missile fired into a crowd at the Nusseirat refugee camp the night before.
The Israeli army said, however, that militants and some civilians had been struck and released a video indicating there was no one on the street near the vehicle targeted in the attack.
Brig. Gen. Ruth Yaron, the army spokeswoman, acknowledged there were civilian casualties, but added that "there is no doubt that the majority of those killed yesterday were terrorists." She held the militants responsible, saying they were using bystanders as human shields.
The air strikes revived debate inside Israel over targeted killings in populated areas, and the Palestinian prime minister, in a rare criticism of Washington, complained that the United States was doing nothing to stop what he said are Israel's "ugly crimes."
Israeli troops killed two wanted Palestinian militants Wednesday in separate raids in the West Bank, reports Berger — one in the town of Hebron, the other in Kalkilya. The army says both were killed while trying to escape arrest; one militant was a senior commander. In the Gaza Strip, soldiers shot and wounded two Palestinians who tried to plant a bomb near the border fence. A 90-pound explosive device was discovered at the site.
Also in Hebron, troops destroyed the house of a Palestinian suspected of sending suicide bombers into Israel, Israeli security officials said.
Meanwhile, the Israeli army believes Palestinian leader Yasser Arafat is "seriously ill," Israeli media reported. The Haaretz and Maariv newspapers said that Maj. Gen. Aharon Zeevi, head of military intelligence, delivered the assessment to the Knesset Foreign Affairs and Defense Committee on Tuesday.
Arafat's aides said Tuesday that the Palestinian leader had gallstones. Earlier this month, Arafat, 74, suffered from stomach problems and looked pale and disoriented, prompting speculation that he is suffering from a serious illness
In Nusseirat, the flag-wrapped bodies of the seven Palestinians were carried on stretchers through the shantytown Tuesday.
"Sharon, wait, wait, you have opened hell's gate," the crowd chanted in a threat of revenge against Israeli Prime Minister Ariel Sharon.
The U.N. resolution approved late Tuesday isn't legally binding, but after more than six hours of extraordinary public negotiations, it not only won support from the European Union but was submitted for a vote by the 15-nation bloc, which is one of the sponsors of the "road map" peace plan.
In return for EU support, the Palestinians and their supporters agreed to drop a second resolution that would have asked the International Court of Justice at The Hague, Netherlands, for an advisory opinion on the legality of the barrier.
But the resolution raises the possibility of going to the court sometime in the future if Israel doesn't comply with the demand to dismantle the barrier.
There were conflicting versions of the Nusseirat air strike.
The Israeli military said helicopters fired two missiles at a car carrying Hamas militants, and that two men inside were killed.
It said the helicopters chased the car after the men had dropped off two other militants near the border with Israel. Those attackers, who were killed by Israeli ground troops, were on their way to carry out suicide bombings inside Israel, the army said.
Israel returned the bodies of the two men killed by ground troops late Tuesday, Palestinian security sources said. The men were identified as Hadi Ayash, 21, and Ali Abu Taha, 23, both of the Rafah refugee camp. Residents said both were members of the radical Popular Front for the Liberation of Palestine.
In the army video, two missiles hit the car after a brief chase. No one appeared to be near the vehicle at the time of the missile strikes, which were about one minute apart.
"We didn't see any massive gathering of people," said a senior air force officer, speaking on condition of anonymity.
A statement by Palestinian security said there were three missile hits, and those killed were struck by shrapnel from a missile fired after they had gathered near the vehicle.
Some witnesses said militants were able to flee the car after the first missile hit. Palestinians said all of those killed were bystanders.