Israeli occupation forces fired into the town of Shijaia and exchanged fire with Palestinian resistance fighters in the area, Palestinian security sources said.
It was still unclear whether the armaments used were surface-to-surface missiles or missiles fired from Apache helicopters.
Four of the wounded were reported to be in critical condition.
Aljazeera's correspondent in Gaza reported that some of those killed may have been Hamas fighters. The correspondent added that members of Hamas had been in training at a football pitch when "four or five missiles fell on the area".
"It may have been a strategic blunder on the part of Hamas to have been training in such an open area," said Aljazeera's Samir Abu Shamala from Gaza.
The Israeli army confirmed the attack early on Tuesday, but gave no further information.
Hamas has branded the Israeli
action a ' war crime'
Hamas spokesman Mushir al-Masri, in the first official reaction for the resistance movement, said: "This ugly Israeli crime ... will not pass unpunished.
"It is an open war between the Zionists and us," he declared.
Another spokesman for the movement in Gaza, Sami Abu Zuhri, described the attack as "a war crime".
"When the Israeli army goes down to that level of criminality and uses its tanks and helicopters to violently target such camps, then this reflects a major war crime," Abu Zuhri told Aljazeera.
Abu Zuhri questioned the absence of the international community in condemning the action by "the so-called State of Israel".
He said the US administration had previously condemned the Palestinian resistance. "Now, our people have been slain so violently but we have not heard a single condemnation by this administration."
Palestinian FM Nabil Shaath (L)
said strike was 'terror attack'
Abu Zuhri vowed that the "Palestinian people will absolutely stand in the face of the crimes committed against it."
"Despite the US administration's conspiracy, the international weakness and Arab silence, the will of our people will never be weakened," he said. "The resistance will continue against this criminal enemy."
Palestinian Foreign Minister Nabil Shaath issued a statement branding it a "terrorist attack by Israeli occupation forces" and accusing Israel of trying to thwart efforts to restore calm.
The growing spiral of violence could further complicate Israeli Prime Minister Ariel Sharon's plan to withdraw troops and settlers from the occupied Gaza Strip by the end of 2005.
The strike inflicted the highest single-day death toll in the coastal enclave since 12 May, when troops killed 15 Palestinians in raids in Gaza City and the southern Gaza Strip.
Later that month, Israeli forces killed 41 Palestinians in the Gaza border town of Rafah during four days of fighting.
Crowding the bloodied halls of Gaza's Shifa Hospital, hundreds of Hamas men carried their dead comrades aloft crying "Allahu Akbar" (God is the greatest) and vowing revenge.