Aljazeera reported witnesses as saying a missile was launched on Saturday by an Israeli helicopter which landed near a mosque in the Khan Yunis camp.
Ali Abd Allah, a Palestinian civilian, died from the attack.
The occupation military said the missile was targeted at a resistance group planning rocket attacks on a nearby settlement.
After the missile strike, 14 tanks and three bulldozers moved into the camp and began tearing down houses. The invasion started around 2300 GMT on Saturday.
Dozens of Palestinian fighters exchanged fire with Israeli forces. The fighting took place on the edge of the Khan Yunis refugee camp in southern Gaza, close to the illegal Jewish Neve Dekalim settlement.
Israeli forces later withdrew, leaving behind destroyed houses in the Nemsawi neighbourhood west of Khan Yunis, Aljazeera said.
Residents emerged from their homes after daybreak on Saturday to inspect the destruction. Municipal officials said 20 homes closest to Neve Dekalim had been destroyed.
Khan Yunis is a regular target
of Israeli destruction
The military said troops destroyed several uninhabited structures that had provided cover for shelling the settlement.
Usama al-Farra, head of Khan Yunis municipality, told Aljazeera: "More than 500 Palestinians became homeless. This is a crime, even mosques were affected.
"It is a tragedy. The potential of the Palestinian national authority is limited in facing this disaster. We seek the help of our Arab brothers to take serious and prompt action, especially as the holy month of Ramadan is approaching."
Fathi Zarub, a father of four, said he lost his two-room house.
"We were forced to leave the house under intensive shooting from the sky and from the tanks," Zarub said by telephone from the camp.
"We took nothing from our belongings. We ran away in our pyjamas, and we have no other refuge. I don't know where I am going to take my children."
Zarub said the homes of most of his relatives had also been destroyed.
Wail al-Dahduh, Aljazeera's reporter in Gaza, said: "Based on the Palestinian official statistics sources, 35 houses in addition to 15 smaller ones were totally demolished by Israeli occupation forces; dozens of Palestinian families became homeless."
Saturday's attack came a day after a mortar fired from the area killed a resident of an illegal Jewish settlement.
Thousands of Palestinians have
been made homeless
On Friday, Hamas fighters fired two mortars at the settlement, killing 24-year-old Tiferet Tratner, who according to settlement officials had dual Israeli-American citizenship.
The mortar attack on Friday marked the first time a resident of a Jewish settlement in Gaza was killed in Palestinian shelling, and was expected to mobilise further opposition to Israeli Prime Minister Ariel Sharon's withdrawal plan.
Thousands of Palestinians have been made homeless by Israeli house demolitions in Gaza in the past four years of fighting. Normally they stay with relatives. If they are refugees, a UN agency sets up temporary shelter.