United Nations Secretary General Kofi Annan has condemned the killing of Palestinian civilians during an incursion by Israeli forces into the Rafah refugee camp.
A Israeli missile was reportedly fired into the Palestinian camp
Seven Palestinians - including two boys aged eight and 15 - were killed in the large-scale raid involving dozens of Israeli troops backed by tanks and helicopter gunships.
Mr Annan said the "disproportionate use" of force in heavily populated areas was incompatible with international law, and called on both sides to take all necessary measures to avoid harming civilians.
Israel says its troops will stay in the area for some days as it continues to seek out and demolish arms-smuggling tunnels.
Soldiers have discovered two tunnels so far - but no weapons - in the camp, which lies on the Gaza Strip's border with Egypt.
Israel says it was acting on intelligence that Palestinian militants were seeking to smuggle from Egypt shoulder-fired missiles that could be used against tanks, helicopters and fighter jets.
Correspondents say the raid marks a change from previous Israeli tactics of launching brief incursions into Palestinian-controlled areas.
"Operation Root Canal" began when Israeli troops
entered the camp from two different directions in the early hours of Friday morning.
Engineering units with dogs trained in locating tunnels joined the search.
Exchanges of fire with Palestinian gunmen swiftly began and carried on for all of Friday.
Palestinian medical sources said the majority of the more than 50 people injured were hurt when an Israeli helicopter fired a missile at the camp.
Israeli military sources said an Israeli helicopter rocketed a building from which the Palestinians were shooting at the incoming troops, the BBC's James Rodgers in Gaza said.
Mr Annan urges both sides to end the killing of civilians
Two of the dead were identified as members of Palestinian militant groups.
There are reports that one Israeli soldier was also injured.
Residents at the camp said a number of homes were bulldozed by Israeli forces and explosions could be heard as tunnels were destroyed.
Water and electricity facilities were also hit, Palestinians said.
A statement from Kofi Annan said: "Not for the first time, the secretary general reminds Israel that the disproportionate use of force in densely populated areas is not compatible with international humanitarian law".
He called again on both sides in the conflict "to take every measure to avoid harming innocent civilians".
An aide to Palestinian leader Yasser Arafat also condemned the raid.
"We strongly condemn these Israeli war crimes which are causing a human tragedy," Nabil Abu Rudeina was quoted as telling French news agency AFP.
But Dore Gold, adviser to Israeli Prime Minister Ariel Sharon, said: "In uncovering the vast network of arms smuggling tunnels in the area of Rafah, Israel is compelled again to do the work that the Palestinian Authority is supposed to do".
Our correspondent says the border area is one of the most dangerous parts of the Gaza Strip, an area where the Israeli army and Palestinian fighters frequently trade shots.
During the conflict the Israelis have demolished scores of houses at the edge of the refugee camp, saying that they were used as firing positions or that the houses concealed tunnel entrances.
Rafah has been cut off from the rest of the Gaza Strip since Saturday, when the Israeli army cut the territory into four parts.
The incursion comes as the Palestinian leadership faces a new crisis amid reports Prime Minister Ahmed Qurei has threatened to resign just two days after being sworn in.