The Israeli army says it has discovered a tunnel running 1.7km (1 mile) from the Gaza Strip into Israel.
The tunnel led from a house to a site close to a kibbutz, Ein Hashlosha, and could have been used to carry out attacks on civilians, a spokesman said.
Israel has responded by halting the transfer of all construction materials to Gaza. Restrictions on the private sector were lifted last month.
Gaza's Hamas rulers accused Israel of "exaggerating things".
By talking about the discovery of a tunnel, Israel was "trying to justify the blockade and the continuous aggression on the Gaza Strip," spokesman Sami Abu Zuhri said.
A spokesman for the military wing of Hamas, al-Qassam Brigades, said on Twitter that "the minds which manage to dig the tunnel can dig dozens more".
The tunnel was uncovered last Monday after kibbutz residents complained of hearing an unusual noise from the heavily fortified border area.
It ran from Absan village near Khan Younis in Gaza under the border fence almost as far as Ein Hashlosha, Israeli media reported.
Explosives found inside the tunnel had since been made safe, the army said. A spokesman told the BBC the tunnel was some 15-18m (50-60ft) deep and would have taken at least one month to dig.
Tunnels have been used before to launch attacks from Gaza. In 2006, Palestinian militants seized Israeli soldier Gilad Shalit who was kept in captivity in Gaza for more than five years.
Israeli PM Benjamin Netanyahu praised the army but warned that the "quietest year in over a decade" had been disturbed by recent militant activities.
A retired colonel was murdered at his home in the West Bank on Thursday night, although police say the motive is so far unclear. Three Palestinians have been arrested.
Defence Minister Moshe Yaalon said the discovery of what he described as the "terror tunnel" was "further proof that Hamas continues to prepare for confrontation with Israel and for carrying out terror attacks, if it feels it is possible.
"Since construction materials were used to dig the tunnel, I instructed, over the weekend, to halt the transfer of these materials to the Gaza Strip."
Israeli human rights group Gisha said 70 lorry loads of building materials for the private sector and 60 loads for humanitarian projects had been due to enter Gaza on Sunday.
Israel tightened a blockade on Gaza when Hamas took power in 2007.
Israel has gradually eased restrictions since 2010.
Egypt, which has its own blockade of Gaza, has recently attempted to close off the network of tunnels used to smuggle goods beneath the border.
Relations have soured since July, when the Egyptian army ousted Islamist President Mohammed Morsi, whose Muslim Brotherhood movement is close to Hamas.