The army said 6.5 tons of potassium nitrate were in bags marked as sugar from the European Union for Palestinians in the coastal enclave.
EU officials in Jerusalem had no immediate comment.
The cargo in a Palestinian truck was traveling in the West Bank and seized several weeks ago at an Israeli checkpoint, the army said.
The EU is the largest provider of humanitarian assistance to Gaza. Israel tightened its military and economic cordon of the Gaza Strip after Islamist Hamas seized the territory in a June war with secular Fatah.