About 50 tanks and helicopters entered the northern town of Beit Hanoun, leaving three Palestinians dead - including a 12-year-old boy, according to Palestinian witnesses.
The Israelis say the raid was launched after dozens of mortar bombs and rockets were fired at Jewish settlements in the Gaza Strip and the southern Israeli town of Sderot in recent days.
The incursion comes on Nakba, which Palestinians describe as "Catastrophe day" - when they mark the anniversary of the displacement that accompanied the creation of the state of Israel in 1948.
It also comes two days before the first meeting between Prime Minister Ariel Sharon and his counterpart Mahmoud Abbas - widely known as Abu Mazen.
not good news for the peace process:disgust:Witnesses say Israeli bulldozers destroyed four homes belonging to suspected militants.
They say the Palestinians killed in the raid included two men and a 12-year-old boy.
According to doctors, the boy was left to bleed to death, as Israeli troops prevented paramedics from reaching the scene.
The Israeli army said it knew nothing about the circumstances of the boy's death.
On Nakba day, Palestinians traditionally attend rallies holding banners with the names of villages they or their family fled in 1948.
"It seems they [Israeli soldiers] are also commemorating the Nakba with us, but in their own bloody way," a Beit Hanoun resident told Reuters news agency.
Israeli tanks were also reported in the nearby town of Beit Lahiya and the Jabaliya refugee camp.