Israeli Prime Minister Benjamin Netanyahu approved the $500 million fence on Thursday with the aim of thwarting drugs and people-smuggling rackets that operate across the border.
''In the end, there will be no choice but to close off the state of Israel by a fence on all sides,'' Mr Netanyahu was quoted as telling his cabinet.
''The state has to be fenced off completely on all sides. Why? Because Israel is the only country in the First World to which people can walk on foot from Third World countries and Africa,'' Mr Netanyahu said.
''If we don't fence ourselves off, Israel will be flooded by hundreds of thousands of foreign workers and illegal residents,'' he said.
Israel's borders with Syria and Lebanon are already sealed with fences and concrete walls and wire fences surround the Palestinian territories of the West Bank and Gaza Strip.
The border with Egypt however has been relatively porous.
According to the new plan to seal the border, the barrier will consist of two parallel barbed-wire fences designed to delay anyone trying to cross it until the arrival of border police.
The fences will be built along either side of a 180-kilometre stretch of natural barrier that separates Israel and Egypt.
Radar systems and other detection devices will be installed along the border to warn of potential infiltrators, along with increased border patrols.
Construction of the fence is expected to take about two years.
Egyptian security officials were reported as saying that Israel had not notified Cairo of its plan to build a fence between the two countries.
Egyptian Foreign Minister Ahmed Aboul Gheit was expected to issue a statement today.
Meanwhile, violence around the Gaza Strip was escalating last night as Palestinian militants continued to fire mortar shells and home-made Qassam rockets at targets in southern Israel.
Since last Friday, Palestinians have fired about 30 mortar shells and Qassam rockets into Israeli territory.
All landed in open territory, causing no damage or injury.
On Sunday, the Israeli air force attacked several targets in Gaza on Sunday, killing three Palestinian fighters believed to be members of the extremist Islamic Jihad group.
The three were said to be engaged in preparations for firing a rocket or mortar shells at Israel.
Islamic Jihad issued a statement claiming two of the operatives as its members.
The third was believed to have been a member of Hamas.
Israeli military officials said last night that Israel had spotted the Palestinians in the act of preparing to fire rockets at Israel.
''The air force spotted, in two different instances and just moments before launch, terrorist cells firing rockets and took advantage of that in order to attack,'' a military spokesman said.
''We have no intention of using restraint in response to launches of any kind.
''Any attempt to harm the civilians of the state of Israel or IDF troops will receive a clear response. They had better not think that we're blinking,'' the spokesman said.