Riyad Mansour, the Palestinian UN observer, told an emergency UN Security Council meeting on Thursday: "This is terrorism, this is state terrorism.
"These are war crimes for which the perpetrators must be held accountable under international law."
But an Israeli diplomat said that Wednesday's shelling in Beit Hanoun had been accidental.
Israel was "deeply saddened" by it and doing its utmost to avoid a repetition, Israeli envoy Daniel Carmon said.
The council met at the request of the 22-member Arab League, the 57-nation Organisation of the Islamic Conference and the 116-nation Non-Aligned Movement after what Ehud Olmert, the Israeli prime minister, referred to as "a technical failure" but which Palestinian leaders have called a massacre.
The 18 dead, including seven children and four women, were buried at a mass funeral in Gaza on Thursday.
Since the end of June, more than 450 Palestinians had been killed in the Gaza Strip, "making death, mourning and grief a near-daily ritual for the people of Gaza", Mansour said.
A draft Security Council resolution put forward by Arab states would call for an immediate ceasefire in Gaza and a UN observer force to enforce the ceasefire, as was done in southern Lebanon after the 34-day war between Israel and Lebanon's Hezbollah that ended in August.
But the US, Israel's closest ally and one of five permanent council members with veto power, typically opposes council intervention in the Middle East conflict as ineffective in ending the Arab-Israeli cycle of violence.
John Bolton, the US ambassador, said: "Despite all of the emotion in the air, we must have an honest and even-handed discussion of recent events in Gaza".
Bolton: Hamas should take steps
to stop attacks
He urged Israel to quickly look into the artillery attack and take steps to avoid a repetition while stressing the responsibility of the Hamas government, which refuses to recognise Israel and reject violence, "to prevent terror and take the necessary steps to stop attacks from within Gaza".
"Progress requires a commitment to peace from both sides of the conflict," Bolton said.
Angela Kane, the UN assistant secretary-general for political affairs, also pressed Israel to do more to avoid civilian casualties and the Palestinians to try harder to prevent rocket attacks on Israel from Gaza.
"We hope that both Palestinians and Israelis will pause and reflect on the fact that the conflict between them will not be resolved by force and that ways must be found to bring about negotiations," she said.
Meanwhile, Saudi Arabia, Qatar and Bahrain denounced the killings on Thursday as a number of Islamic foreign ministers prepared to meet to discuss Israel's offensive.
A Saudi government spokesman denounced what he called the "carnage".
"An urgent international conference needs to be convened, with the participation of all the parties [concerned with the Middle East problem] to put an end to these massacres and protect the Palestinian people," he said.
"These are war crimes for which the perpetrators must be held accountable under international law"
Palestinian UN Observer
Sheikh Hamad bin Khalifa Al Thani, the amir of Qatar, telephoned Mahmoud Abbas, the Palestinian president, to "denounce Israeli aggression in Beit Hanoun and the human losses they have caused", the official QNA news agency said.
And in Manama, Khaled bin Ahmed Al Khalifa, the Bahraini foreign minister, said the attacks by Israel constituted a "disappointing reversal that is leading the region towards a dangerous precipice with grave consequences".
Ministers from Azerbaijan, Malaysia, Pakistan, Qatar, Saudi Arabia, Senegal and Yemen will meet Palestinian representatives on November 18, the 57-member OIC said on Thursday.
Abbas requested the meeting in a telephone conversation with Ekmeleddin Ihsanoglu, OIC secretary-general, the bloc added.