Israeli troops have swept through a Palestinian refugee camp in Gaza while helicopters pounded it with missiles.
Civilians were among those hit in missile attacks
At least 20 Palestinians were killed in Rafah camp, including several gunmen and two children hanging out washing.
Palestinian leader Yasser Arafat called it a "massacre", while the UN and EU called on Israel to halt the operation.
US President Bush said the bloodshed was "troubling", but told a Jewish-American audience that Israel had the "right to defend itself from terror".
The Israeli military says "Operation Rainbow" is designed to attack militants and stop the flow of weapons smuggled through tunnels from Egypt.
It denied there were plans for a further systematic demolition of homes, after knocking down almost 100 houses in the camp last week, leaving 1,100 people homeless.
But two left-wing Israeli MPs condemned the operation.
RAFAH REFUGEE CAMP
Largest of several camps near city of Rafah, southern Gaza
Established in 1949 to house 41,000 refugees from newly-founded state of Israel
Expanded in 1967 when Gaza occupied by Israel
About 1,800 houses demolished by Israeli army since 2000
"It is completely unacceptable to continue baptising Gaza in blood because when Gaza is drenched in blood, it will also be the blood of our children," warned Labour politician Avraham Burg.
The BBC's Middle East correspondent, James Reynolds, says the Israeli army is determined to show that it has regained control of Gaza after 13 soldiers were killed there last week - the country's worst military loss in two years.
The raid began at dawn, with a missile from a helicopter fired at a group of gunmen outside a mosque in Tel Sultan, killing three of them.
Two more missiles were fired, killing three more people who rushed to help and leaving the mosque in flames.
In a second air strike, four Palestinians were killed, all civilians, according to hospital officials quoted by the Associated Press news agency.
Seven Palestinians, most of them gunmen, were also reportedly killed in street fighting.
And Ahmad Mughayer, 13, and his sister Asma, 16, were shot dead as they stood on the roof of their house. Both were hit in the head as they hung out washing, relatives said.
A Palestinian health official said a 20th man was killed while handling explosives.
Commentators describe the operation as one of the biggest in the area in years.
Trapped residents were reported to be huddling in the most protective rooms of their homes as bullets rained outside. Others tried to flee the area.
Rafah hospital and local clinics were reported to be unable to cope with the flow of bodies and wounded people.
Meanwhile, Israeli soldiers killed a Palestinian in the West Bank town of Nablus and a local militant leader in Jenin, the Israeli military said.