Palestinians in Gaza's Jabaliya refugee camp say they were given no warning before an Israeli tank fired a shell at them.
Palestinians say an Israeli tank fired on them
Witnesses claim scores of people gathered outside a burning building were injured in the explosion.
The Israeli army has admitted that a shell was fired from a tank, but says the deaths were caused by a bomb intended by militants to target troops.
Israeli officials say the 11 people killed were Palestinian gunmen, but witnesses dispute that.
Television pictures shot at the scene show crowds watching flames darting out of blown out windows. A powerful explosion then rocks the street.
Marwan Abu Shamales, 49, told the Associated Press news agency he came out of his house early in the morning to see the aftermath of the raid. He thought troops had withdrawn.
I started screaming and I fell down on the two legs of a dead man
Marwan Abu Shamales,
"When the fire engines arrived and started working to control the fire, the sound of an explosion was heard," he said.
Mr Shamales was injured by what doctors said was shrapnel from a tank shell.
"I started screaming and I fell down on the two legs of a dead man. I will never forget this disgusting scene," he said.
Other witnesses described how many people were caught up in the blast.
Mohammed Abu Sraya, 45, told the AFP news agency: "A first shell was fired and set a building on fire, some 200 people came down in the street to see was going on and help extinguish the fire.
A crowd had gathered outside a building on fire
"Then a second shell was fired in their midst."
The man, who owns a furniture shop in the now burnt-out building, said civilians were among the casualties.
"I carried Naji Abu Jalila, a 25-year-old fireman, away from the scene... he died by the time we reached the hospital," he said.
Mahmud Eif, a 37-year-old dentist, said he "heard the first shell and then I saw smoke coming up".
He said many in the crowd which gathered were trying to help.
I really hope we didn't hit civilians
Brigadier-General Gadi Shamni,
Gaza division army commander
"Some 250 people, men, women and children, came outside to help out the family that was trapped inside the burning building, I called an ambulance and the fire service," he said.
"As soon as they came, another shell was fired in the direction of the crowd."
A doctor at a nearby hospital said he had seen 10 bodies after the raid and was treating many wounded.
"Thirty-five [are] in very bad general condition, severe traumatic injury with fractures and contusions, very bad parts of wounds, skull, neck, chest, abdomen and severe facial trauma," he said.
"We have a lot of persons, children, women and girls."
The Israeli army says its operation in Jabaliya was aimed at arresting a suspected Hamas militant.
Shots were fired during the operation and a tank shell used, but not into a crowd, officials said.
Brigadier-General Gadi Shamni, Gaza division army commander, was quoted by Associated Press as saying: "I really hope we didn't hit civilians.
"I think it is known that this is not how the army works. It is not our method to hit civilians."