Hundreds of Palestinians have been killed in the past weeks
The Pope's justice minister, Cardinal Renato Martino, has sharply criticised Israel's actions and likened the Gaza Strip to a "big concentration camp".
Correspondents say his words mark the Vatican's toughest comments since Israel began its offensive with intensive air attacks 12 days ago.
He accused both sides of only thinking of their own interests while innocent people paid the price.
Pope Benedict XVI has already called for an end to the conflict.
Cardinal Martino, president of the Vatican's Council for Justice and Peace, made the comment to Italian online site Il Sussidiario.
"Defenceless populations are always the ones who pay," he said.
"Look at the conditions in Gaza: more and more, it resembles a big concentration camp."
The BBC's David Willey in Rome says relations between Israel and the Vatican have been strained recently, after the Pope made it clear that he favoured making Pope Pius XII a saint.
The controversial wartime pope was accused by some Jews of turning a blind eye to the holocaust.
Cardinal Martino's comments were immediately criticised by Israel, who said the Vatican was repeating Hamas propaganda.
Call for intervention
Israel says it wants to stop rocket attacks on southern Israel and to stop Hamas smuggling weapons into Gaza via Egypt, while Hamas says any ceasefire deal must include an end to Israel's blockade of Gaza.
Cardinal Martino urged both sides to hold peace talks.
"If they can't come to an agreement, then someone else should do it [for them]," he said.
"The world cannot sit back and watch without doing anything."
He added: "We Christians are not the only ones to call this land 'holy', Jews and Muslims do so too.
"The fact that this land is the scene of bloodshed seems a great tragedy."
There was a brief lull in hostilities on Wednesday when Israel halted military operations in Gaza for three hours to create "humanitarian corridors" for supplies and fuel.
It followed the deadliest day of the operation - more than 130 Palestinians were killed on Tuesday, medics said.