The artillery shells were fired on Friday by Israeli gunboats stationed just off the Mediterranean coast.
The dead and the wounded Palestinians were having a picnic on the beach as it was the weekly holiday, Aljazeera's correspondent Wael al-Dahduh said.
The barrage scattered body parts along the seaside. A tent was destroyed, and bloody sheets were scattered about. A crowd quickly flocked to the area, screaming and running around in confusion.
Mahmoud Abbas, the Palestinian president, called the attack "a bloody massacre" and urged the international community, including the US, Europe and the Security Council, to intervene.
Palestinian medical sources said five of those killed at the beach were members of the Ghali family from Gaza. Children aged one, three and 10 died alongside their parents, Ali and Raisa.
The wounded were transferred to three hospitals - al-Shifaa in Gaza City, Kamal Adwan in Jabaliya refugee camp and al-Awda in Bait Lahiya, al-Dahduh said.
The Israeli army said it determined aircraft and gunboats had not fired the artillery that struck the picnic, but that ground forces might have been the source.
It said military chief Lieutenant-General Dan Halutz ordered a halt in artillery attacks in the area while an investigation continued.
"We regret any harm caused to innocent civilians," said Captain Jacob Dallal, an army spokesman. He said Israel offered medical assistance, including evacuation to hospitals in Israel, to the wounded.
The Israeli army initially said its ships had fired shells at fighters who launched rockets after Israel's killing of Jamal Abu Samhadana, a leader of the Popular Resistance Committees (PRC), on Thursday.
Gaza's Mediterranean Sea coast
is policed by Israeli gunboats
Dallal said the army does not know "for certainty" if the shells were fired by Israel, and he said the military "deeply regretted" any civilian deaths.
Also on Friday, Aljazeera's correspondent al-Dahduh said, an Israeli missile attack on Salaheddin Street in the centre of Gaza left several Palestinians injured, after a series of Israeli strikes and shelling killed nine people.
Palestinian officials said the street attack killed a man travelling in a car, but there were no details on the identity of the man, and the Israeli army said it was investigating the report.
Three Palestinians were killed in an earlier air strike on a car in the northern Gaza Strip, Palestinian security sources said.
The killings raised the death toll in Israeli attacks on Friday to 13. At least nine civilians were among the dead, according to Palestinian officials.
In the first of the day's missile strikes, a Palestinian from the PRC who was preparing to fire rockets into southern Israel, was wounded, Palestinian and Israeli sources said.
The committees said the rockets were being fired in retaliation for Israel's killing overnight of Samhadana.
Samhadana and three others were killed in an Israeli air strike on a training camp for militia members near Rafah in the Gaza Strip on Thursday.
Samhadana was killed by an
Israeli rocket on Thursday
Hours after his death, two rockets were fired by Palestinians in Gaza at the Israeli town of Sderot, but did not cause any casualties.
Thousands of Palestinians gathered to show their support for Samhadana at his funeral in Rafah on Friday.
"Abu Ataya, we will deliver our answer in Tel Aviv," chanted hundreds of armed Palestinians before unleashing a volley of gunfire into the air.
A member of the PRC said in a speech to the crowd: "Abu Ataya is the Zarqawi of Palestine" - a reference to Abu Musab al-Zarqawi, the al-Qaeda chief in Iraq who was killed on Wednesday by the US.
Samhadana was an ally of the Hamas government and had been appointed to head a new security force.
The Palestinian president blocked the appointment amid the political tensions between Hamas and Abbas's Fatah faction, and Samhadana did not take up the position.
Gaza's beaches are a favourite
picnic spot (Photo L El-Haddad)
The Hamas government said Samhadana's killing was a "war crime" against a "national leader".
Ghazi Hamad, a government spokesman, said: "Israel's targeting of a government official is a dangerous step.
"Israel is responsible for the consequences of this crime and the response from the resistance."
The Israeli military said that Samhadana was a legitimate target.
"The PRC terror organisation, under the personal instruction and direction of Abu Samhadana, is responsible for a variety of terror attacks against Israeli civilians," the army said in a statement.