At least eight children were among 10 people killed at a Gaza City refugee camp, medics said, with witnesses saying several missiles were fired from an F16.
But the Israeli army categorically denied any attack on the camp, accusing Palestinian militants of firing rockets at Israel which apparently misfired.
Emergency services spokesman Ashraf al-Qudra said 10 people had been killed, among them eight children who had been playing in the beachfront Shati refugee camp.
He said another 46 were injured, among them many children.
Local residents told AFP that several missiles were fired at a tuktuk motorised rickshaw near a children's playground.
"An F16 fired five rockets at a street in Shati camp where children were playing, killing some of them and injuring many more," one told AFP.
Inside Shifa hospital, an AFP correspondent saw the bodies of at least seven children from the blast at the camp, with more bodies being brought in on bloodied stretchers.
They were unloaded and taken directly to the mortuary, he said.
Near the site of the blast, women wailed and men screamed in anguish in scenes of utter confusion and distress.
Shortly before the blast, another israeli missile hit a building inside the Shifa hospital compound, causing damage but no injuries, medics and an AFP correspondent said.
An AFP correspondent at the scene said a wall of a building inside the compound was damaged by a missile apparently fired by a drone.
But the Israeli army denied they had fired on Shati camp or Shifa hospital.
"We have not fired on the hospital or on Shati refugee camp," Major Arye Shalicar told AFP.
"We know that Hamas was firing from both areas and the missiles struck these places," he said, adding that since the violence began on July 8, around 200 missiles fired at Israel had fallen short and landed inside the Gaza Strip.
Asked about witness reports of a drone strike, he categorically denied it.
"That's a lie. We have drones there but they are only for surveillance," he told AFP, saying they were not equipped to fire missiles.
Israel has killed over 1,050 Palestinians since it started its onslaught against Gaza three weeks ago. 50 Israelis were killed.
*This story was edited by Ahram Online