Troops, tanks and aircraft are involved in the ongoing invasion which Israel suggested was aimed at punishing the perpetrators of Tuesday morning's resistance attack.
One of the dead was a 12-year-old child.
A hospital spokesman told Aljazeera at least seven of the injured were in a serious condition. Some had undergone operations to have their legs amputated, reported the correspondent. Others had lost their eyes.
The number of casualties is expected to rise as fighting rages on and ambulances continue to ferry victims to hospitals.
Aljazeera's correspondent said Israeli helicopters were flying overhead while tanks in the Netzarim settlement opened fire at Palestinian citizens.
Israeli occupation soldiers took up positions on rooftops at al-Zaitun, shooting at every moving object, the correspondent said. They are, however, facing stiff resistance.
Locals said fierce battles erupted in the early hours when troops sped into the quarter in jeeps, civilian taxis and tanks and forced their way into numerous buildings to set up rooftop observation posts.
An army spokesman confirmed troops had used explosives to force entry into several buildings in a move to surround homes belonging to Hamas and Islamic Jihad resistance fighters.
Flames from the blown up vehicle
seen over Gaza City
The six soldiers died when their armoured vehicle was torn apart after troops and tanks backed by helicopter gunships stormed the teeming al-Zaitun neighbourhood.
The military wing of the Hamas resistance movement claimed responsibility for the operation.
In a telephone call to Aljazeera, Izz al-Din al-Qassam Brigades said it had blown up an Israeli military personnel carrier on Tuesday using an explosive device.
The vehicle was packed with about 220 pounds of explosives, for use in blowing up weapons workshops. Combined with a roadside bomb detonated by the resistance fighters, the explosives produced a powerful blast.
An Israeli official, speaking on condition of anonymity, said
in a densely populated area troops were heaving difficulty retrieving the remains under heavy fire.
The blast scattered body parts across a radius of about 300 yards.
Islamic Jihad's al-Quds Brigades also informed Aljazeera it had damaged an Israeli tank earlier on Tuesday in the same area. Witnesses said they saw injured Israeli soldiers inside the military vehicle.
The Palestinian fighters also said they were keeping body parts of the dead Israelis.
"We possess the remains of your bodies that were thrown into the streets of Gaza. We have our demands to hand them over to the Zionist occupier," said a joint statement by Islamic Jihad and al-Aqsa Martyrs Brigades. It did not list conditions.
Senior Islamic Jihad political leader Khadir Habib said resistance fighters were holding the soldiers' mangled body parts and would not release them until there was a total halt to Israeli raids and Israel opened talks on release of jailed fighters.
The number of injured Palestinians
is expected to rise
Following the attack, Israeli Prime Minister Ariel Sharon vowed Israel would seek out and strike at Palestinian fighters "wherever" they hide.
"We are paying a heavy price to ensure the security of Israelies. We are fighting a cruel enemy and we will relentlessly fight him wherever he operates and wherever he hides," he said
Israel's foreign minister Silvan Shalom called for the removal of Palestinian president Yasir Arafat from his headquarters in Ram Allah.
He said there would be no "moderate Palestinian leadership" as long as Arafat remained in place.
The flare-up came amid speculation about the fate of Sharon's plan to pull out of the flashpoint, Gaza Strip.
The "disengagement" plan includes a troop withdrawal from most of Gaza and the removal of all 21 settlements there. Sharon hopes to 'compensate' for the loss by annexing territory in the West Bank. Both areas were occupied by Israel after its 1967 war against Arab states.
However, the pullout plan was rejected by Sharon's own Likud party on 2 May, in the face of majority public opinion in Israel supporting the idea.