Zohair al-Qaisi, secretary general of the Popular Resistance Committees (PRC), was attacked because he was planning an attack, the Israelis said.
Another militant was killed with him. The Islamist Hamas movement which runs Gaza said at least eight more died in later Israeli air strikes.
The Israeli military said dozens of rockets were fired into Israel.
A spokeswoman said the rocket attacks had injured at least four people, one seriously. Some of the rockets had been intercepted by Israel’s “Iron Dome” anti-missile system, she added.
The rockets were apparently fired in retaliation for the killing of the PRC leaders.
Correspondents say it is one of the worst outbreaks of violence along the Gaza border for several months.
Islamic Jihad said the dead men were part of its military organization.
Medical sources say another man was seriously injured in the attack on the car carrying Mr Qaisi, near Gaza City.
Witnesses say Israeli drones were heard in the area shortly before the car burst into flames, the Associated Press reports.
The first air strike came a few hours after two mortar shells fired from Gaza landed in Israel without causing injury.
The PRC, which represents a number of armed factions aligned with Hamas, has carried out several rocket and grenade attacks against Israel. It also sometimes operates independently of Hamas.
An Israeli military spokesman said Mr Qaisi was behind a series of gun and bomb attacks near Israel’s border with Egypt last year, in which eight Israelis were killed. Ten of the attackers and five Egyptian soldiers also died.
The spokesman warned Israelis living within range of rockets fired from Gaza to stay indoors overnight.
A spokesman for the PRC in Gaza vowed to take revenge on Israel for the attack.
“All options are open before the fighters to respond to this despicable crime. The assassination of our chief will not end our resistance,” Abu Attiya, a spokesman for the PRC group told Reuters.
The BBC’s Middle East correspondent Kevin Connolly says the PRC is behind many of the mortar and rocket attacks which continue to be launched against Israeli towns from inside Gaza.
The former head of the PRC, Kamal al-Nairab, and its military chief were killed in a similar Israeli attack last year.
