One demonstrator scaled several floors of the high-rise embassy building to tear down the Israeli flag and replace it with an Egyptian one, a Reuters witness reported.
He was feted as a hero by one would-be Egyptian leader.
"Hamdi Sabahi, the Egyptian presidential candidate, sends a salute of pride to Ahmad al-Shahat, the public hero who burned the Zionist flag that spoiled the Egyptian air for 30 years," Sabahi said in statement.
However, there were signs that Egypt and Israel were both trying to ease the gravest crisis in their relations since longtime ruler Hosni Mubarak's overthrow in February.
The spat has highlighted the dilemma faced by the generals now ruling Egypt, caught between pressure to preserve the 1979 peace treaty with Israel and popular hostility to the Jewish state, perceived as trampling on national dignity.
Egypt said on Saturday it would recall its ambassador from Israel after the killings that it said breached the peace treaty. The Foreign Ministry summoned the Israeli charge d'affaires to protest and demand a joint investigation.
Israeli Defence Minister Ehud Barak said Israel regretted the deaths and he told the army to conduct the investigation with Egypt, which responded with cautious approval.
A delegation led by an unidentified high-ranking Israeli envoy arrived in Cairo on a private plane from Tel Aviv on Sunday to a low-key reception, airport sources said. Four cars drove onto the tarmac to whisk the delegation away.
Officials from Egypt's defence ministry and the ruling army council were due to meet on Sunday morning, according to a cabinet official who asked not to be named.
It was unclear if Egypt's ambassador in Israel had actually returned home and a strongly-worded initial statement announcing his withdrawal was removed from a government website, prompting speculation that Cairo might have retracted its decision.
A spokesman said the cabinet stood by statements made by its
information minister, but declined to comment on the recall of the ambassador, which was also reported by state media.
Mubarak's removal in a popular revolt has emboldened many Egyptians to voice their demands on the streets and allowed anti-Israel Islamists to play a greater role in formal politics.
The army is trying to keep a lid on social tensions as Egypt prepares for elections later in the year as part of a promised transition to democratic, civilian rule.
Egypt's condemnation of Israel in a statement after a second cabinet crisis meeting on Saturday was unusually blunt.
"Egyptian blood is not cheap and the government will not accept that Egyptian blood gets shed for nothing," state news agency MENA quoted a cabinet statement as saying.
The Israeli decision to work with Egypt to investigate the killings is "positive in appearance but does not fit with the weight of the incident and the state of Egyptians' outrage from the Israeli actions', MENA added.
"And just as Egypt confirms it is keen on peace with Israel, Tel Aviv will also have to share its responsibilities in protecting that peace," MENA said.
The statement said the government had asked for a deadline for the joint investigation to conclude its work, adding that crisis meetings would continue until the results are released.
The crisis began when gunmen killed eight people in southern Israel on Thursday in attacks near Egypt's porous desert border, prompting Israeli forces to chase the infiltrators, killing seven of them.
Israel blamed the attack on a Palestinian faction that entered from the Hamas-run Gaza Strip via Egypt's Sinai desert.
The Israeli military killed the faction's leadership in an air strike in Gaza on Thursday and launched more than a dozen more raids on Friday. Medical officials say at least 15 Palestinians have been killed, including five civilians.
Palestinian militants fired at least 50 rockets at Israel from the Gaza Strip on Saturday. An Israeli man was killed and at least seven other people were wounded by rockets.
Militants fired a dozen more rockets from Gaza towards Israel on Sunday. At least two landed in the Egyptian border town of Rafah, apparently in error, but did not explode and no one was hurt, an Egyptian security source said.
The Cairo-based Arab League was due to meet later in the day to discuss the latest violence, after a Palestinian request.