At least 13 members of one extended family died as they were sleeping when tank fire hit their home in Wednesday's incident.
The killings happened a day after Israel started to withdraw its tanks from Beit Hanoun in northern Gaza after a week-long offensive in which dozens of people died.
Tzipi Livni, the Israeli foreign minister, called the deaths in Beit Hanoun "a regrettable incident".
"The Israeli military does not intend to harm civilians - that is never our aim. But in the framework of such things, incidents like these happen," Livni said.
Local residents spoke of horrific scenes after the Israeli tank fire hit several houses in Beit Hanoun.
"Five of my brothers have no heads ... my father-in-law has lost his legs, he's left with just shattered flesh," one man told
Al Jazeera following the attack.
Beit Hanoun has borne the brunt of recent Israeli attacks
A 14-year-old girl identified as Athamna said: "There were wounded people when the shell fell on my uncle's house, we went to help but when we got there another shell fell on us."
Mahmud Abbas, the Palestinian president, said that the killings had "destroyed all chances of peace".
"You [the Israelis] do not want peace at all. You have destroyed all chances of peace and you should bear all the responsibility," he told reporters in Gaza City following the attack.
"Our people are at the end of our tether. We need to speak up to tell the world, from the UN to Europe, to examine these acts of atrocity committed by Israel because a worldwide reaction is needed to bring them to an end."
Alvaro de Soto, the UN's envoy to the Middle East, said he was "deeply shocked and appalled" by the killings and called for an immediate end to Israeli military operations following the attack.
Several children died in the early
European nations said that the attack should spur international efforts to resolve the Israeli-Palestinian conflict.
Massimo D'Alema, the Italian foreign minister, said: "This morning 18 people were massacred ... an escalation of violence I think is unacceptable.
"I think that now an international initiative to unblock the Palestinian situation is essential."
Call for support
Ismail Haniya, the Palestinian prime minister, called on Arab and Islamic countries to support the Palestinians.
"Why does the Arab League not convene? Why does the Islamic Conference Organisation not convene?" he told Al Jazeera.
"A nation is being slain, a land is being destroyed. Jerusalem, al-Aqsa mosque and Islamic and Christian shrines are being desecrated in the Palestinian lands."
Several Arab and Islamic leaders condemned the attack but, despite Haniya's pleas, offered no promises to help the Palestinians financially or militarily.
Amr Moussa, the head of the Arab League, said that he was convening an emergency meeting to discuss an Arab response.
Ehud Olmert, the Israeli prime minister, said in a statement that he regretted the attack but said that Israel's army had fired in an attempt to prevent Palestinians from firing rockets into Israel.
Amir Peretz, the Israeli defence minister, ordered the army to stop shelling Gaza until an investigation had been completed, his ministry said.
An army spokeswoman said that artillery had fired on an area used by Palestinians to fire rockets at Israeli cities.
Ten such projectiles exploded inside Israel over the past 24 hours, the spokeswoman said.
She said: "This morning, we fired artillery shells to stop rocket fire. We fired on an area where the rockets are fired from. We are checking Palestinian reports that people who were not involved in the [rocket] fire were hit."