Islamic Jihad confirmed the death of Baha Abu Al-Ata, 42, in an Israeli airstrike on his home in the Shejayia district east of Gaza City, which also reportedly killed his wife.
Israel blamed Ata for recent rocket fire into its territory and accused of him of preparing further attacks.
Mosque loudspeakers also announced Ata's death.
His killing led to retaliatory airstrikes on Israel with a building hit by a missile, although no casualties were reported.
Islamic Jihad said it was targeting Jerusalem, Tel Aviv and other cities with rocket fire.
"We are preparing for a number of days of fighting," Israeli military spokesman Jonathan Conricus said.
Schools were closed in both the Gaza Strip and in parts of Israel, including Tel Aviv.
The Israeli army ordered "non-essential" workers in Tel Aviv and central Israel to stay at home in anticipation of more strikes.
"A building in the Gaza Strip, in which the Palestinian Islamic Jihad senior leader Baha Abu Al-Ata stayed in, was attacked," Israel's military said in a statement, calling it a joint operation between the army and Israel's Shin Bet domestic security service.
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Islamic Jihad said it was on "maximum alert," while Hamas, the Islamist movement that rules the Palestinian enclave, threatened revenge.
Ata was blamed for rockets being fired toward a music festival in the Israeli city of Sderot in August as well as further rocket attacks at the start of November.
He was also allegedly behind sniper fire and drone launchings.
Ata "is responsible for most of the terror attacks in the last year from the Gaza Strip", the Israeli army said, describing him as a "ticking bomb".
It alleged he was "promoting preparations to commit immediate terror attacks in various ways towards Israeli civilians and (Israeli) troops during the recent few days".
Islamic Jihad confirmed one of its officials, Akram Ajouri, was targeted in an Israeli airstrike in Damascus.
Syrian state news agency SANA said the strike targeted Ajouri's home "killing his son Muadh and another person".
The strikes raised the possibility of a severe escalation between Israel and Palestinian militants in Gaza.
Hamas and Israel have fought three wars since 2008, and Gaza has been under a strict Israeli blockade for more than a decade.
Islamic Jihad is the second most-powerful militant group in the Gaza Strip, behind Hamas which rules the enclave, and has close ties to Iran.
Israel's military said it had "deployed troops and is prepared for a wide range of offensive and defensive scenarios."
Israeli Prime Minister Benjamin Netanyahu's office confirmed the strike targeting Ata in a statement and is expected to speak on the latest flare-up.
A 17 September general election ended in deadlock with a new government is yet to be formed. It was the second election since April, when polls also ended inconclusively.