About 100 people were wounded in five air raids over a 12-hour period on Monday, including a missile strike after dark on a roadside crowd.
The attacks followed an ambush by gunmen in which three Israeli soldiers were killed in the West Bank and the launch of eight makeshift rockets from Gaza into Israel on Sunday.
The violence dealt a severe new setback to a stalled US-backed peace plan and touched off new vows of retaliation by the Palestinians.
In the bloodiest raid, medics said seven people were killed and at least 70 wounded in a missile attack after dark on the Nusayrat refugee camp in central Gaza. One of the dead was a 12-year-old child, they said.
Israel carried out three air strikes in five hours in or near Gaza City earlier in the day, killing two resistance fighters and a bystander and wounding 23 people. Three people were hurt in the fifth attack, just outside Gaza City, late in the evening.
One missile fired by a helicopter gunship hit a car and another slammed into a crowd of people by the road, prompting angry protests and calls for retaliation, witnesses said.
Mourners condemn Israel during
the funerals of Hamas activists
"It's a massacre. They slaughtered civilians with no mercy," one protester at the scene said. Blood covered the ground near the car and the wounded lay scattered around the vehicle.
In the heaviest morning raid, a helicopter-fired missile hit a mini-van at a traffic light in densely populated Gaza City, sending pedestrians fleeing in panic.
Two Hamas fighters were burnt to death in the vehicle. Aljazeera's correspondent identified them one Khalid al-Masri, a senior member of the Islamist resistance group. The other was his colleague Iyad Faiz al-Hilu.
Sharon condemns Arafat
Sharon sent a tough message to the Palestinians in a speech to the Israeli parliament in which he criticised Arafat, Reuters reported.
"This man is the biggest obstacle to peace and therefore Israel is determined to bring about his removal from the political arena," he said in his 30-minute speech interrupted frequently by heckling from leftwing and Israeli Arab deputies.
Sharon said he remained committed to the US-backed Middle East "road map" and said he even saw a real chance for progress towards a peace settlement with the Palestinians in coming months.
But Sharon offered no new initiatives and reaffirmed many of his hardline policies, including the decision by his security cabinet last month to remove Arafat eventually from power.
Chief Palestinian negotiator, Saib Uraiqat, accused Sharon of undermining peace.
"Most of those killed are civilians. It's the bloodiest and most dangerous escalation in years," Uraiqat said.