Israel's military on Wednesday said it had discovered and destroyed a tunnel used by senior Hamas leaders and to hold hostages in southern Gaza's main city of Khan Yunis.

Special forces unearthed what they said was a "strategic underground tunnel" stretching more than one kilometre (just over half a mile) in a "targeted raid".

The city -- home to Hamas's Gaza leader Yahya Sinwar -- has been the focus of intense bombardment in recent weeks, as Israel seeks to hunt down the masterminds of the deadly October 7 attack.

Images circulated by the army showed what it said was a "hostage holding cell", with tiled walls and steel bars from floor to ceiling.

"This tunnel held approximately 12 hostages at different times; three of them have been returned to Israel, and the rest are still being held in Gaza," a statement read.

The army did not offer details of which hostages were held there.

The tunnel, built "under the heart of a civilian area", also included a bathroom, kitchen and a rest area for captors, and was part of an "intricate and interconnected underground labyrinth", it added.

It was used "to hide high-ranking members of the Hamas terrorist organisation and to hold hostages" and was linked to another recently discovered tunnel where other captives were held, it said.

Special forces were seen in an army video entering a small outer entrance in an apparent crater surrounded by debris and mangled concrete and near an apartment complex, it added.

The military also showed off hand grenades and rocket propelled grenades that it said it had found and disabled.

Some 250 hostages were seized in the October 7 attack on southern Israel, which led to the deaths of about 1,160 people, most of them civilians, according to an AFP tally based on Israeli figures.

Israel says 132 hostages remain in Gaza, of whom 29 are believed to have died.

"Trapped in tunnels underground, they face darkness, hunger, fear, loneliness and sexual abuse as their daily reality," campaign group the Hostages and Missing Families Forum said in a separate statement.

"If we don't get them out of there immediately they may not survive another day."

More than one million Palestinians have fled to Gaza's far south to escape Israel's bombardment, which has killed more than 27,700 people according to the health ministry in Hamas-run Gaza.

The Israeli military claims senior Hamas figures have retreated to the tunnel system, which it dubs the "Gaza Metro", with entrances deliberately built in and around civilian infrastructure.