Israel's army said Sunday it was holding the bodies of five Palestinians found after it blew up a tunnel last week stretching from the Gaza Strip into its territory.

Israeli media said they would most likely be retained as bargaining chips to retrieve the bodies of soldiers believed to held by the strip's Hamas rulers.

The military stressed that the Palestinian bodies were found in Israeli territory following the operation to blow up the tunnel that left at least 12 Palestinians dead.

It did not say what conditions it would place on their return.

"We are indeed in possession of those bodies of five terrorists," military spokesman Jonathan Conricus told AFP.

"All were killed or died inside Israeli territory, not in the Gaza Strip."

Israel blew up the tunnel on October 30 after monitoring it for some time, saying it had no choice but to act after "the grave and unacceptable violation of Israeli sovereignty".

Hamas, the Islamist movement that runs the Gaza Strip, has used such tunnels to carry out attacks in the past.

Two of the 12 dead belonged to the military wing of Hamas, with the other 10 from Islamic Jihad, which said Friday that the bodies of five of them remained trapped in the tunnel.

Israeli public radio's veteran military affairs reporter, Carmela Menashe, said Sunday evening that the bodies held by the army "are indeed the missing which Islamic Jihad spoke of and wanted returned".

Defence Minister Avigdor Lieberman brushed off arguments that humanitarian law demanded that an enemy should be allowed to bury its dead.

He said the decision on what to do with the bodies would be taken by Israel's security cabinet, on which he sits.

"This is not a legal issue, this is a political and security issue, and if there is disagreement it will be resolved in the security cabinet and not in any other forum," he said on Israeli television.

"Our position is that this is a bunch of terrorists which came to murder and slaughter Jews and we don't owe them anything, especially when they are holding the bodies of our citizens."

The remains of two Israeli soldiers killed in the 2014 Gaza offensive are thought to still be in the coastal territory.

Three Israeli civilians, all said to be mentally unstable, are also believed to have entered Gaza and to be held by Hamas.

Indirect negotiations led to a 2011 deal which saw Israel release more than 1,000 Palestinian prisoners in exchange for soldier Gilad Shalit, who had been held for five years.