A military statement said the drone "fell in the area of Eilat" on the Red Sea coast after air defences had failed to intercept it, in the second such incident within days.
Israel's Magen David Adom emergency medical service said its teams had treated 22 casualties, including two men, aged 26 and 60, who were in serious condition with shrapnel wounds.
One person was moderately injured with a shrapnel wound to the back, and 19 others were in light condition suffering "from shrapnel and other injuries", the medical service said.
Police said the drone fell in Eilat's city centre, causing damage in the area frequented by tourists.
Footage shared on social media, which AFP could not independently verify, showed a drone flying above the resort town before crashing with smoke rising from the impact area.
There was no immediate claim of responsibility for the attack, which occurred on the second day of Rosh Hashanah, the Jewish New Year.
Yemen's Iran-backed Huthi rebels have claimed similar attacks throughout the Gaza war since late 2023.
In an interview with Israel's Channel 12, Eilat mayor Eli Lankri called on the government to "strike the Huthis hard" in retaliation for the drone attack.
Lankri added that repeated Huthi attacks have disrupted operations at the Eilat port.
The army earlier said air raid sirens rang throughout Eilat, a popular resort town at Israel's southern tip near the Egyptian and Jordanian borders where Israeli authorities had reported a drone strike on Thursday.
Defence Minister Israel Katz threatened retaliation, saying that the Huthis "will learn the hard way" not to attack his country.
Israel has already carried out multiple air raids on rebel-held areas of Yemen, and last month assassinated the head of the Huthi government together with 11 other senior officials.
Yemen's Huthis have repeatedly launched missiles and drone at Israel since the start of the war in Gaza, with the rebel group saying it was acting in support of its Palestinian ally Hamas whose October 2023 attack sparked the war.
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