Dozens of Palestinian demonstrators on Friday broke into the Gaza side of the terminal - the main conduit for goods in and out of the territory - setting a pipeline that delivers gas from Israel alight, torching a goods conveyor belt and damaging a fuel pipe.
"The crossing will remain closed until the damage caused by the riots are repaired and will reopen in accordance with a situation assessment," the Israeli military said, adding that in the meantime it will be opened for humanitarian cases only.
More than two million people are packed into the narrow coastal enclave of Gaza, where poverty and unemployment rates are high. Kerem Shalom is one of three main Gaza border crossings with Israel and Egypt, but it is where most goods pass through daily.
The incursion took place during a weekly mass protest in which thousands of Palestinians gathered along the Israel-Gaza frontier.
Palestinian health officials said that earlier on Friday one man was killed by Israeli fire. The Israeli military said the crowd had grown violent and that troops were defending the border.
More than 40 Palestinians have been killed during six weeks of protests and tens of thousands of Gazans are expected at tented border encampments in the coming days.
It was unclear to some Gaza residents why the demonstrators chose to attack the terminal.
"I cannot find one good reason for what happened, what is the wisdom behind this?" said one gas station owner, who asked not to be identified.
"Some petrol stations have storage for maybe a day or two, so the crisis will begin by Monday or Tuesday should the crossing remained closed," he said.
The Palestinian National Committee said it was "surprised by the non-delibrate and unfortunate incident that damaged property" at Kerem Shalom and called on Palestinians to preserve the crossings.
Gaza is run by the Islamist Hamas movement, which Israel and the West designate a terrorist organization. Citing security concerns, Israel maintains tight control over its land and sea borders. Egypt also restricts movement in and out of Gaza.
The border protests are building to a climax on May 15, the day Palestinians call the "Nakba" or "Catastrophe", marking the displacement of hundreds of thousands of Palestinians in the conflict surrounding the creation of Israel in 1948.
(Reporting by Nidal al-Mughrabi and Ari Rabinovitch; Editing by Alexander Smith)