Seventeen Palestinians were killed and at least 84 injured in the raid, punctuated by air strikes, that began on Sunday and continued into Monday.
The United Nations Relief and Works Agency said the army had also destroyed 23 Palestinian homes.
One of the houses belonged to a Hamas fighter and others may have been damaged during the fighting, military officials said, speaking on condition of anonymity.
Troops backed by scores of tanks and bulldozers had ripped up roads, damaging the water and sewage pipes on the outskirts of the camp, witnesses said.
Aljazeera's correspondent reported that vast areas of farmland were also destroyed.
Up to five missiles were fired during the raid and troops on the ground opened fire on Palestinians, killing 17 and wounding at least 84 others, including civilians and policemen.
An eight-year-old child who was hit in the neck by a bullet was among the dead.
Palestinian schoolchildren had faced off with Israeli troops in the teeming refugee camp, pelting them with rocks.
Several homes and swathes of
farmland have been destroyed
Army gunfire against the protesters killed a boy, 11, and a 19-year-old man, witnesses and medics said.
Military sources said the crowd included youths with Molotov cocktails and said troops opened fire to disperse them.
"We condemn this Israeli military escalation," Palestinian Negotiations Minister Saib Uraiqat said in the West Bank.
"It seems to me that the deliberations in parliament about Gaza are being translated into more Palestinian blood."
Khan Yunus governor Husni Zuarab told Aljazeera that a mosque in the western district of al-Namsawi was also destroyed in the assault.
"Operation Days of Penitence or all other Israeli operations are continuing against all governorates of Palestine," he said.
"It seems to me that the deliberations in parliament about Gaza are being translated into more Palestinian blood"
Palestinian negotiations minister
Troops in military vehicles and bulldozers are redeployed outside the al-Namsawi neighbourhood in western Khan Yunus and outside the Batn al-Samin area in the south.
Early on Tuesday, an Israeli aircraft shot a missile at a group of people, killing one Hamas resistance fighter and wounding seven other people, including two other activists, Palestinian hospital officials said.
The military had no immediate comment.
In the Rafah region of the southern Gaza Strip, a 28-year-old Palestinian was killed by Israeli soldiers, Palestinian medical sources said.
Tens of families have been
left homeless by the raid
Abd al-Aziz Muamar was fatally wounded in the abdomen when soldiers opened fire near the Sufa crossing point into Israel, to the east of the Rafah refugee camp, the sources added.
Despite receiving hospital treatment, he later died of his injuries.
Israeli troops killed
Hamas on Tuesday, in a report on its website, said three Israeli soldiers have been killed in an attack on their armoured personnel carrier in Khan Yunus.
Witnesses said a group of fighters affiliated to the al-Qassam Brigades, the military wing of Hamas, fired an RPG at the vehicle.
The Israeli occupation army said two of its soldiers had been injured but later Israeli radio reported that three soldiers were killed in the attack.
The raid occurred just 10 days after Israeli troops wrapped up a major offensive in the northern Gaza Strip that left 130 Palestinians dead.
UN statistics showed that the offensive also left 675 Palestinians homeless and caused more than $3 million worth of damage.
The latest deaths raised to 4532 the number of people killed since the second intifada began in September 2000, including 3502 Palestinians and 956 Israelis.