One of the rockets struck near a school in Sderot

At least nine other people were injured in the southern town of Sderot after two rockets launched from the nearby Gaza Strip landed near a kindergarten.

Militants often fire rockets into Israel from Gaza, but this is the first time they have killed Israelis.

Earlier, a huge explosion at an Israeli army outpost in the Gaza Strip killed one soldier and injured five others.

Israeli army sources said Palestinian militants dug a tunnel and set off the blast from beneath the base.

Israeli helicopters later fired missiles at two metal workshops in the Zeitoun area of Gaza City, but no serious injuries were reported.

Soon after the attack on the military outpost at the Gush Katif junction - near Israeli settlements - a Palestinian police officer and a teenager were killed by Israeli gunfire near the nearby Khan Yunis refugee camp.

The Israeli army said there was heavy Palestinian gunfire from the camp and that troops fired back.

Rocket attack

Israeli security sources said two rockets landed near a Sderot school and shopping centre.

A man was killed as well as the three-year-old boy. The child's mother was among the injured.

AUDIO GALLERY Sderot: Israeli town in the firing line

Television footage from the scene showed a child's shoes lying in a pool of blood in the street.

"So far Sderot had been lucky in the Qassam (rocket) attacks, but that luck ran out today," Israeli cabinet minister Gideon Ezra told Israel Radio.

The Israeli Prime Minister Ariel Sharon planned to hold security consultations later on Monday, an official said.

"The prime minister is determined to continue with his disengagement plan and terrorism will not dictate our political plans," a senior Israeli official said.

Hamas 'dug tunnel'

Palestinian militant groups Hamas and the Al-Aqsa Martyrs' Brigades both separately claimed responsibility for the attack, saying they were avenging the deaths of leaders and activists killed by Israel, including seven militants shot dead in the West Bank over the weekend.

The Gaza blast did not hit areas where many soldiers may have been

The explosion at the army base went off at shortly before 2200 (1900 GMT) on Sunday, bringing down a building.

Hamas told journalists that its military wing dug a 350m tunnel under the outpost and then packed it with hundreds of kilograms of explosives.

The militant group said its forces waited until there was a shift change in the tower and then set off the explosives when there was the maximum number of soldiers inside.

Israel was braced for huge numbers of casualties, but the commander of the base said the blast did not hit sleeping or resting areas where large numbers of troops might have been congregated.

The blast prompted hundreds of Palestinians to celebrate on the streets of Gaza City.

Earlier on Sunday, Palestinian militants vowed to avenge the killings on Saturday of seven Palestinian militants in the West Bank city of Nablus.

Among the dead were the West Bank leader of al-Aqsa Martyrs' Brigade and top figures in Hamas and Islamic Jihad.