Israeli forces have rescued two hostages, storming a heavily guarded apartment in the southern Gaza Strip and extracting the captives under fire in a dramatic raid that was a small but symbolically significant success for Israel.

The operation killed at least 67 Palestinians, including women and children, according to Palestinian health officials in the beleaguered territory.

To assist the rescue forces, heavy airstrikes pounded the area near the apartment in Rafah, a city on the southern edge of the Gaza Strip where 1.4 million Palestinians have fled to escape fighting elsewhere in the Israel-Hamas war.

"It was a very complex operation," Israeli military spokesman Lieutenant Colonel Richard Hecht said.

"We’ve been working a long time on this operation. We were waiting for the right conditions."

The raid was celebrated in Israel as a victory in the sluggish battle to free the hostages, with more than 100 captives still held by Hamas and other Gaza militants, and briefly lifted the spirits of a nation still reeling from Hamas' cross-border raid last year. 

But in Gaza, where civilians have borne a staggering toll since the war erupted on October 7, the operation unleashed another wartime tragedy, with many Palestinians killed or wounded.

More than 12,300 Palestinian minors – children and young teens – have been killed in Israel’s war against Hamas, the Health Ministry in Hamas-run Gaza said. That means minors make up about 43 per cent of the total number of 28,176 Palestinians killed so far. About 8400 women were also among those killed.

The plight of the hostages has profoundly shaken the nation and Israel has made freeing the dozens of remaining captives a top aim of its war, along with destroying Hamas’ military and governing capabilities.

But as the war drags on, now in its fifth month, their freedom remains elusive and rifts have emerged in Israel over the best approach to end their ordeal.

Fernando Simon Marman and Louis Hare reunite with loved ones at Sheba Medical Center, in Ramat Gan. – Reuters

Israeli Prime Minister Benjamin Netanyahu has insisted persistent military pressure will bring about their freedom, even as other top officials have opposed this idea, saying a deal is the only way to secure their release.

The army identified the rescued hostages as Fernando Simon Marman, 60, and Louis Har, 70, abducted by Hamas militants from Kibbutz Nir Yizhak in the October 7 cross-border attack that triggered the war.

A photograph released to media showed them in hospital, sitting on a sofa alongside relatives.The Argentinian government thanked Israel for the rescue of the two men, who it said were dual nationals of Argentina.

Two freed Israeli hostages in stable condition, says hospital. – Reuters

They were among roughly 250 taken captive during Hamas’ stunning cross-border raid, when an estimated 1200 people, mostly civilians, were killed, according to Israeli authorities. Israeli’s retaliatory air and ground offensive has killed over 28,000 Palestinians, according to local health officials, displaced over 80 per cent of the population and led to a massive humanitarian crisis.

Over 100 hostages were freed during a weeklong ceasefire in November. Israel says about 100 hostages remain in Hamas captivity, and Hamas also holds the remains of roughly 30 others who were either killed on October 7 or died in captivity. Three hostages were mistakenly killed by the army after escaping their captors in December.

Israeli military spokesman Read Admiral Daniel Hagari said the two hostages had been held in a second-floor apartment in Rafah, under guard from Hamas gunmen, both in the apartment and nearby buildings.

Hagari said special forces broke into the apartment under fire at 1.49am Monday, accompanied a minute later by airstrikes on surrounding areas.

Palestinians in Rafah said two mosques and several houses were hit in more than an hour of strikes by Israeli warplanes, tanks and ships, causing widespread panic among people who had been asleep.

“It was the worst night since we arrived in Rafah last month. Death was so near as shells and missiles landed 200 meters from our tent camp,” said Gaza businessman Emad, a father of six.

Hagari said members of the rescue team shielded the hostages with their bodies as a heavy battle erupted in several places at once with Hamas gunmen.

"This was a complex rescue operation under fire, in the heart of Rafah, based on sensitive and very high-quality intelligence," Hagari said.

The hostages were taken to a nearby “safe area,” given a quick medical check and airlifted to Sheba Medical Center in central Israel. Their medical condition was reported to be good.

They are just the second and third hostage to be rescued safely; a female soldier was rescued in November.

Hagari said the operation was based on precise intelligence and planned for some time. Netanyahu joined Israel’s military chief and other top officials as the raid unfolded.

The rescue is a small step toward winning the release of the remaining hostages, who are believed to be spread out and hidden in tunnels, likely in poor condition.

Har’s son-in-law, Idan Begerano says he was "shocked" by their "unexpected" rescue. – Reuters

Har and Marman were kidnapped from a home along with three other relatives who were freed in the late-November deal. No other family members of theirs remain in Gaza.

Har’s son-in-law, Idan Begerano, said he and his wife were able to see the released captives at the hospital.

"A lot of tears, hugs, not many words, just being together surrounded by the family and surrounded by our beloved people that were without us for so long, more than four months," he said.

"We were so happy to see them."

He said the two men were thin and pale, but communicating well and aware of their surroundings.

"Mentally they look OK, physically they look OK, but I’m sure that you know, we’re going to have ups and downs in the coming days or weeks, and we really hope for good and we wish them good health,” he said.

Begerano said Har told him immediately upon seeing him: “You have a birthday today, mazal tov.”