Two rockets fired from Egypt's Sinai peninsula struck Israel's Red Sea resort of Eilat on Wednesday.
Responsibility was claimed by a militant Islamist group in a move that alarmed Israeli analysts. No one was injured.
Militant groups are thought to have stepped up their activities in Sinai since Egyptian President Hosni Mubarak's downfall in 2011.
An Israeli military spokeswoman said two rockets were launched from Sinai and both hit open areas.
One of the rockets is said to have exploded near the courtyard of a house.
Police spokesman Micky Rosenfeld said the remains of two Grad-style rockets had been found and bomb experts were looking for more.
In a statement posted on its website, the Islamist militant group Magles Shoura al-Mujahddin said it had targeted Eilat with two Grad missiles and then withdrawn safely.
Egyptian security sources said the rockets had probably been fired from Sinai but it needed to investigate further.
A senior military official told AFP: "We are still investigating to see if they were delivered from Egyptian territories but nothing is confirmed yet."
The Egyptian presidency stressed that Egypt rejects any attack against any country.
Magles Shoura al-Mujahddin is said to share the same ideology as al Qaeda and recruits its members from Egypt and Palestine, among others.
The group said it was retaliating for what it described as Israel's attack on protesters demonstrating over a Palestinian prisoner's death.
Two weeks ago, Israeli troops shot dead a Palestinian youth in the occupied West Bank during confrontations with protesters angered by the death in prison from cancer of 64-year-old Maysara Abu Hamdeya.
Palestinian officials said he had been denied timely medical care. Israel denied any negligence.
Israel deployed an Iron Dome anti-rocket battery in Eilat some two weeks ago, a period coinciding with the Jewish Passover holiday when the city at the tip of Gulf of Aqaba is packed with vacationers.
But on Wednesday, the system did not intercept the incoming missiles "for operational reasons", the spokeswoman said, without elaborating. The attack was carried out a day after Israel celebrated its 65th anniversary.
Rockets last struck Eilat in November, causing no injuries or damage.
Until the deployment of its missile defence shield in the south of the country, Israel came under regular attack from a variety of improvised and illegally smuggled weaponry, mainly from Gaza.
Islamic militant groups, some believed to be affiliated with the al Qaeda terror network, have taken advantage of a power vacuum in the lawless Sinai since Mubarak was ousted and have carried out a string of rocket attacks along the border.
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