Egypt has been carrying out digging work in the area for several weeks that is intended to flood the last remaining tunnels between Gaza and the Sinai.
Palestinians fear such moves will further isolate Gaza, where more than 100,000 were left homeless in last summer's war with Israel and which is blockaded by the regime.
Egyptian officials have declined to comment on the work criticized by Hamas, the Palestinian resistance movement that runs the Gaza Strip, where residents have reported water seeping over the border.
"Why are they digging those trenches and those water pipes around Rafah?" Hamas's chief in Gaza, Ismail Haniyeh, said on Thursday during a speech to commemorate the Muslim Eid al-Adha holiday, AFP reported.
"And why discard neighbourly relations and the history of Gaza, which has always defended the regional security of Egypt and Arab countries? We are telling our Egyptian brothers: Stop this project. We will do our duty against those who besiege Gaza and plot against it."
Egypt has already established a buffer zone 10 kilometers long and half a kilometer wide along its border with Gaza.
Since the military-led ouster of its former president Mohamed Mursi in 2013, Egypt says it has destroyed hundreds of tunnels used to transport essential goods, such as clothing and other products.