The Hamas-run health ministry in Gaza has said dozens of people were killed or injured in a blast at a refugee camp in the Rafah area.
The Israel Defense Forces (IDF) said it had carried out an air strike targeting a Hamas compound in the area. It says it is reviewing the incident.
Earlier in the day Hamas fired eight rockets from Rafah towards Tel Aviv, the first long-range attacks on the city since January.
Videos from the southern Gaza Strip show a large explosion and intense fires burning.
Hamas said an Israeli air strike had hit a camp for displaced Palestinians north-west of Rafah, away from recent military operations in a designated humanitarian safe zone.
It says women and children are among the dead.
The IDF said it had targeted Hamas militants in the area and said it was aware of reports the strike had ignited a fire which harmed civilians.
It was reviewing the incident but said it had used precision weapons against legitimate targets.
Earlier on Sunday air raid sirens sounded around Tel Aviv as central Israel came under attack by Hamas rockets, fired from close to Rafah.
The eight rockets were either intercepted by air defence systems or fell in fields.
Israel’s military offensive has continued in Rafah, despite the International Court of Justice ruling on Friday that it must halt.
The rocket barrage highlights the threat Hamas still poses to people across Israel, although there were no reports of injuries.
It also illustrates the challenges the Israeli army faces as it moves further into southern Gaza to oust Hamas from what it calls its “last major stronghold”.
The rocket attack came ahead of further ceasefire negotiations between Israel and Hamas, which are expected to resume next week.
The military wing of Hamas said it had acted in response to "the massacre of civilians".
Israel began a long-anticipated offensive in Rafah about three weeks ago, vowing to destroy the remaining Hamas battalions there.
It says it believes Israeli hostages are also being held in the town.
The UN says more than 800,000 Palestinians have fled from Rafah since the offensive began.
About 1.5 million had been sheltering there from the fighting elsewhere in Gaza.
Israel's military campaign in Gaza began after Hamas-led gunmen attacked Israel on 7 October, killing about 1,200 people and taking 252 others back to Gaza as hostages.
Nearly 36,000 Palestinians have been killed in the war since then, according to Gaza's Hamas-run health ministry.
