The Israeli military has launched strikes into Gaza, killing four Palestinians and wounding hundreds, in retaliation for Palestinian gunmen killing an Israeli soldier on the Gaza front.

At least 120 Gazans were wounded and three Hamas fighters were among the four Palestinians killed in the military strikes. The fourth was a protester, according to local residents and medics.

The Israeli soldier, shot by Palestinian gunmen, was the first to be killed on the Gaza front in active duty since a 2014 war between Israel and Hamas.

He was on "operational activity" when he and colleagues came under fire, according to the Israeli military.

"The event that happened today is something that we cannot tolerate and cannot allow to become a routine norm, that's why we retaliated and that's why we continue to target military targets belonging to Hamas," Israeli military spokesman Lieutenant-Colonel Jonathan Conricus said.

Israel said its aircraft and tanks had struck dozens of targets belonging to Hamas and across the Gaza Strip, including a drone warehouse, aerial defence systems and observation posts.

A relative of a Palestinian who was killed by Israeli troops east of Khan Younis, reacts in the central Gaza Strip. ( REUTERS: Ibraheem Abu Mustafa )

Israel and Hamas later agreed to restore calm along the Gaza Strip following the flare-up which lasted several hours.

"With Egyptian and United Nations efforts it has been agreed to return to the era of calm between [Israel] and Palestinian factions," Hamas spokesman Fawzi Barhoum said.

Palestinian residents said the area was calm after midnight, and an Israeli Army spokeswoman confirmed there was no known military activity in the Gaza Strip.

Hamas to continue kite attacks

Earlier, Hamas defied Israeli Defence Minister Avigdor Lieberman's calls to stop launching incendiary balloons from the coastal enclave and he threatened to order a military offensive to prevent them.

Fires caused by kites and helium-filled balloons have ravaged farmland in Israel in recent months.

Smoke rises following an Israeli air strike in Gaza City. ( Reuters: Ahmed Zakot )

The tactic has become popular during the months-long Gaza border protests, known as The Great March of Return, in which Israeli security forces have killed more than 140 Palestinians.

Palestinians are protesting to demand the right to return to homes and villages they fled or were driven from during the conflict surrounding the creation of the modern state of Israel in 1948.

But more recently, some Gaza officials said the protests would end if Israel lifted an economic blockade of the Strip.

Israel says Hamas has been orchestrating the demonstrations to provide cover for militants' cross-border attacks. Hamas denies this.

Khalil Al-Hayya, Hamas's deputy chief in Gaza, said the kites would continue to fly.

"In the face of Zionist threats, we say the resistance will continue, the marches will continue and its tools will continue to vary and take different forms, including the kites," he said.

ABC/Reuters