It was not clear what caused the blast after nightfall on Monday in the Shajaiyeh neighbourhood, near the border with Israel, but the Palestinian Authority pointed at Hamas while Hamas blamed Israel.
Aljazeera's correspondent in Gaza said the explosion occurred inside the home of Muhammad Farahat, an al-Qassam Brigades "martyr".
A witness said it was a powerful explosion and caused damage to a number of adjacent houses.
Medical sources said among the wounded were women and children from the neighbourhood.
More than 35 people were injured, four seriously, in the explosion, Palestinian medical sources at al-Shifa hospital in Gaza told Aljazeera.
Sources did not rule out Hamas activists among the victims.
PA blames Hamas
The Palestinian Interior Ministry said the blast was caused by Hamas-manufactured bombs which went off prematurely.
In a statement, the ministry said the blast went off in a house where one of the rooms was used "by members of Hamas to make explosive charges".
"Somebody [from Hamas] was preparing a bomb, when a mistake occurred and then the explosion went off"
"A fault set off a fire and several of the charges exploded because of the increased temperature inside the room," it added, calling on the movement to "not shy away from its responsibilities".
"Somebody was preparing a bomb, when a mistake occurred and then the explosion went off," an Interior Ministry statement said.
Hamas fingers Israel
The official spokesman for Hamas, Sami Abu Zuhri, held the Israeli authorities responsible for what he called "al-Shujaeya massacre".
"What occurred was an Israeli crime when an Israeli warplane launched a rocket at the targeted house, killing and wounding a large number of Palestinians," he said.
"Resistance will continue, while the movement remains committed to the period of calm and is entitled to retaliate for this crime in the proper time and place," Abu Zuhri said.
Abu Zuhri (R) described Monday's
attack as a massacre
The Hamas spokesman, however, said there was no truth in the rumour that the general leader of Hamas' al-Qassam Brigades, Muhammad al-Dhaif, was present at the site of the explosion.
Khan Yunus clashes
In other developments, 16 people were wounded, among them five Palestinian policemen, in a second day of clashes in Khan Yunus in southern Gaza between hundreds of unemployed Palestinians and the police force.
A large group of policemen attempted to disperse the protesters by firing in the air.
Some of the demonstrators have threatened more such protests if their demands are not met.