The UN secretary-general spoke on Sunday at an emergency meeting of the Security Council that he convened after the Israeli air strike in Qana.
"I am deeply dismayed that my earlier calls for an immediate cessation of hostilities were not heeded," Annan said.
"I repeat this call once again from this chamber and I appeal to the council to do likewise.
"Action is needed now before many more children, women and men become casualties of a conflict over which they have no control."
Sunday's attack was Israel's bloodiest since it launched an air and ground offensive on Lebanon in reprisals for the kidnapping of two soldiers by the Lebanese Shia group Hezbollah on July 12.
France earlier on Sunday circulated a draft resolution in the Security Council calling for an immediate ceasefire in Lebanon and proposing terms for a settlement of the conflict.
The Lebanese people are "mourning their martyrs ... with one voice they are calling upon you for a ceasefire"
Lebanon's special envoy to the UN, Nouhad Mahmoud
The Security Council has so far been unable to take a stand on the fighting partly because the United States, unlike other members of the council, has refused to back Annan's calls for an immediate ceasefire.
Washington backs Israeli demands for the Lebanese army, bolstered by an international force, to deploy to the south of the country currently controlled by Hezbollah, which has used the territory to fire rockets at northern Israel.
A Lebanese special envoy to the UN announced at the emergency session that more
than 60 bodies, mostly women and children, have been found in Qana
"Rescue workers have now plucked more than 60 corpses from under a residential building. More corpses continue to be plucked from the ruins, mostly women and children," Nouhad Mahmoud said.
Annan said the council risked undermining its own authority if it did not take action.
He said that was made clear by a violent protest outside the UN headquarters in Beirut earlier on Sunday with some storming the building and destroying windows and furniture inside.
"People have noticed its [the UN] failure to act firmly and quickly during this crisis," Annan said.
Mahmoud also criticised the council for its lack of action and said Israel was committing war crimes.
"Israel is committing atrocities against humanity," Mahmoud said.
"The fact that such massacres are yet ... to be taken up by resolutions of this august council - that fact does not mean that the truth is to remain hidden."
Dan Gillerman (Israel) blamed
Hezbollah for the Qana deaths
The Lebanese people are "mourning their martyrs ... with one voice they are calling upon you for a ceasefire".
The Israeli ambassador to the UN, Dan Gillerman, called it a "horrible, sad and bloody Sunday".
Gillerman said Qana "a hub for Hizbollah" and that Israel had told the residents of the village to leave.
He apologised for the air strike, but said there was no comparison between Hezbollah, which he said intentionally targets Israeli civilians and uses Lebanese civilians as human shields, and Israel - which he said tries to avoid civilian casualties.
"Those people including women and children who were killed in this horrible tragic incident may have been killed by Israeli fire but they are the victims of the Hezbollah," Gillerman said.
"They are the victims of terror. If there were no Hezbollah this would never have happened."
Gillerman said Hezbollah must be disarmed before any ceasefire occurs. Otherwise, he said, Hezbollah will rise again, "not just against us and not just against the people of Lebanon, but against the whole region and civilisation as we know it".
"Action is needed now before many more children, women and men become casualties of a conflict over which they have no control"
The Israeli prime minister, Ehud Olmert, told the visiting US secretary of state, Condoleezza Rice, that the army needed another 10 to 14 days to finish its campaign in Lebanon.
The US president embraced the Israeli position and sidestepped calls for an immediate ceasefire - although he did urge Israel to take more care to avoid civilian casualties.
He instead repeated his intention to work with the United Nations towards creating "a sustainable peace" in the region.
"Today's actions in the Middle East remind us that the United States and friends and allies must work for a sustainable peace, particularly for the sake of children," Bush said on Sunday.
Bush resists calls for an
His remarks were his first direct comments on the attack on the southern Lebanese village of Qana, where at least 37 of the victims were children.
Bush said he had spoken twice to Condoleezza Rice, the US secretary of state, and once with Tony Blair, the British prime minister, on Sunday.
He said that Washington was determined to work with the UN Security Council to craft a resolution for lasting Middle East peace, "a peace that will enable mothers and fathers to raise their children in a hopeful world".
Separately, Annan said that the Israeli army had asked UN peacekeepers in south Lebanon to evacuate two more villages before sunset, but that they were unable to do so
The UN mission in Lebanon "did receive a request [from the Israeli military] that [they wanted] the population of two villages, Ramyah and Ayta ash-Shab ... to be evacuated before sunset today", Annan told the emergency session.
"Of course Unifil has refused to evacuate the villages, indicating that they don't have the capacity," he said.
"This is something I thought you should know to let you understand the dynamics in the region and in the south."