"Three of our soldiers were killed and another four were injured," Israeli army chief Lieutenant General Ehud Barak told Israel radio.
The militant Islamic Jihad movement said it carried out the attack at a checkpoint guarded jointly by Israeli and Palestinian forces near Netzarim settlement to avenge the car-bombing death of activist Hani Abed on Nov. 2.
Friday's explosion is likely to increase Israeli pressure on Arafat to curb Islamic opponents of the Israel-PLO peace deal in Palestinian-ruled Gaza where Israel maintains a several settlements.
Gaza hospital sources said six Palestinians including a senior police officer were wounded in the blast, which took place three days after a conciliatory meeting in Gaza between Palestine Liberation Organization leader Yasser Arafat and Israeli Prime Minister Yitzhak Rabin.
Barak said the suicide bomber riding a bicycle detonated explosives strapped to his body at the checkpoint.
Two armed and masked militants claimed responsibility in the name of Islamic Jihad for the attack, announcing at a memorial for Abed in Gaza City that the militant group had carried out "the first revenge attack for the death of Hani Abed."
"One unit from Islamic Jihad has swooped on a position of the Zionist enemy near the military police," the activists said, referring to a "martyrdom attack" -- implying a suicide assault. Islamic Jihad blames Israeli agents for booby-trapping Abed's car in Khan Younis in southern Gaza.
Arafat condemned the attack.
"President Arafat, who is following the situation very closely ... has asked me to condemn the operation in his name regardless of its source," aide Khaled Salam said.
"He asserted that the Palestinian Authority and its bodies will take all necessary and deterrent measures to deal with the situation," Salam said.
Israeli Housing Minister Binyamin Ben-Eliezer called on Arafat to act.
"All the expectations that Arafat would be in control of the territory are not being realized," Ben-Eliezer said.
Barak said an Israeli-Palestinian liaison committee would convene later on Friday to discuss security.
"We consider the Palestinian Authority responsible for uprooting this kind of terrorism inside their territory," Barak said at the scene of the attack.
Israel maintains nearly 20 small settlements, guarded by its army, inside Gaza which came under Palestinian rule in May.
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