The UN's agency for Palestinian
refugees has launched a multi-million dollar appeal for the people of Rafah.
The UN says the destruction was the most intense since the start of the intifada
Hundreds of families were made homeless by the Israeli army's recent offensive, during which dozens of houses were demolished in the southern Gaza Strip.
UNRWA chief Peter Hansen said almost $16m is needed to repair the damage.
A parliamentary debate on Israeli
Prime Minister Ariel Sharon's Gaza pull-out plan which was due to take place on Monday has been postponed.
The Knesset debate will now take place on Tuesday next week.
On Monday, Mr Sharon presented a revised version of the floundering plan to his Likud Party, a day after he failed to win the backing of his divided cabinet for the Israeli withdrawal from the Gaza Strip.
Dozens of Palestinians, whom Israel says were mainly armed militants, were killed in the Israeli incursion into Rafah.
Israel says the offensive was aimed at destroying tunnels used to smuggle arms into the territory.
Throughout Operation Rainbow, Rafah's houses were smashed, streets churned up by tanks and even the local zoo destroyed.
UNRWA says it was the most intense destruction in Gaza since the start of the intifada.
"Rafah was always a poor place, it is now a devastated place," Mr Hansen said.
"The situation is untenable."
Mr Hansen said 760 families had been left destitute, forcing many of them to bed down on the floors of UNRWA-run schools for shelter.
"We cannot not go out and build until we have the money and the land, so we are caught in a squeeze," he said, explaining that the money raised would be used to rehouse families.
Part of the money will also go towards repairing the town's shattered infrastructure - repairing sewage and water pipes, along with power and telephone lines.
Israel says three tunnels were uncovered and destroyed during the operation.