Khaled al-Dahduh, also known by his nom-de-guerre Abu al-Walid, was killed instantly when the vehicle in which he was travelling exploded in a ball of flames in Gaza City, medics and witnesses said.

Dahduh, the overall leader of the Al-Quds Brigades armed wing, was the most high-profile victim of Israel's policy of so-called targeted killings since the larger Islamist group Hamas won a Palestinian general election five weeks ago.

News of his death emerged as an Israeli working at a service station near a Jewish settlement in the northern West Bank was fatally wounded in a drive-by Palestinian shooting. The radical Al-Aqsa Martyrs Brigades claimed the attack.

The latest deaths bring to 4,970 the number of people killed since the outbreak of the Palestinian uprising in 2000. Most of the victims have been Palestinian.

While Hamas has halted its campaign of attacks in the past year, Jihad has carried out half a dozen suicide bombings inside Israel and decided to snub the democratic process.

Both groups are classified as terrorist organisations by Israel and their members are liable for arrest for activities on their behalf.

In a sign that Hamas's entry into mainstream politics has not altered their status in the eyes of the Israeli authorities, two newly-elected MPs for the radical faction were arrested in annexed east Jerusalem on Wednesday.

Police spokesman Shmuel Ben Rubi said that Mohammed Abu Teir and Mohammed Totah were detained while touring Al-Maqassid hospital on the Mount of Olives and campaigning for new Hamas members.

"They are not allowed to do any political activities in Jerusalem," he said.

A Hamas source said Abu Teir and Totah were arrested as they toured the Makassid hospital as part of an inspection of institutions in east Jerusalem.

Since the 1967 Middle East war, Israel has occupied and annexed east Jerusalem, which the Palestinians want to make the capital of their future state.