The killing comes less than a month after Israel assassinated Hamas's founder, Sheikh Ahmed Yassin, in an air strike. Rantissi had been one of Israel's prime targets in its campaign against the militant Palestinian group.

Israeli missiles destroyed Rantissi's car this evening on the road outside his home in Gaza. He was taken to hospital in critical condition but died shortly after he arrived. After the explosion, Israeli helicopters were heard in the area.

Witnesses said there were three people in the car at the time of the explosion. Five pedestrians were also wounded, hospital officials said.

The dead included Rantissi's bodyguard, Akram Nassar, aged 35, and Rantissi's son Mohammed, 27, hospital officials said. Rantissi's wife was in the car, but her condition and location were not known.

Angry, mourning crowds gathered at the hospital, crying, beating their fists against the wall, praying and reading from the Koran.

Shooting was heard in the centre of Gaza City, as well as chants of Rantissi's name. "This blood will not be wasted," said Ismail Haniyeh, a Hamas leader at the hospital. "We are not going to give up."

Rantissi was Hamas's top leader in Gaza and one of the most hardline members of the militant movement who rejects all compromise with Israel and calls for the destruction of the Jewish state.

Israel had previously tried to kill Rantissi on June 10 when three Apache helicopters fired at least seven missiles towards his car in a crowded Gaza street. His car was destroyed but Rantissi escaped with a leg wound. Two Palestinian bystanders were killed.

In a retaliatory attack the next day, 16 Israelis were killed in a Hamas suicide bombing in Jerusalem.

Palestinian officials expressed fury at the Israeli strike. "We condemn in strongest possible terms this Israeli crime of assassinating Dr Rantissi. This is state terror, and the Israeli government is fully responsible for the consequences of this action," cabinet minister Saeb Erekat said.

Israeli officials justified the attack as part of the continuing battle against militants who have killed more than 900 Israelis in attacks in the past three and a half years.

"We have to continue this war, every time and every place. And this story with Rantissi shows how the army can get everywhere. We have to continue, we have no other choice," cabinet minister Gideon Ezra told Israel Radio.

The explosion happened in the Sheik Radwan neighbourhood of Gaza City, about 100 metres from where Sheikh Yassin is buried. Israel has vowed to kill the entire leadership of Hamas.

Israeli sources said they had targeted Rantissi at the first available opportunity and said he had been planning a big attack on Israel to consolidate his leadership of Hamas and to retaliate for Sheikh Yassin's killing.

During the mourning period for Sheikh Yassin, Rantissi was defiant about Israel's threats against him. "We will all die one day. Nothing will change. Whether by Apache or by cardiac arrest, I prefer Apache," he said.

The air strike occurred hours after an Israeli border policeman was killed by a Palestinian suicide bomber at the Erez crossing on the Israeli-Gaza border.

The killing occurred against the backdrop of President Bush's endorsement of a plan by Israel's prime minister, Ariel Sharon, to withdraw unilaterally from Gaza but retain permanent control of some parts of the West Bank. The plan has enraged Palestinians.