"The prognosis is of widespread violence, collapse of already failing Palestinian institutions and a worsening of the human rights and humanitarian crisis."
Khan criticised Israel's "deliberate and reckless shooting and artillery shelling or air strikes carried out in densely populated areas in the Gaza Strip".
She also criticised Palestinian fighters for firing makeshift rockets at Israel which "have created a climate of fear, which is leading to a hardening of positions in favour of a harsh military response".
"Despair about the forseeable future is fuelling violence and the radicalisation of a predominantly young Palestinian population who see no prospects of a normal life," she said.
Khan recommended the establishment of a human rights monitoring mechanism, the investigation and prosecution of those responsible for crimes under international law, and the immediate halting of sales or transfer of weapons to all parties to the Middle East conflict.
She also called for the removal of Jewish settlements in the West Bank, the dismantling of Israel's separation barrier, an end to the strict closure system in the West Bank and a fair solution to the Palestinian refugee question.
Mark Regev, Israel’s foreign ministry spokesman, had no immediate comment.
"The presence of international human rights monitors will really strengthen the non-violent movement and peaceful movement the Palestinians are leading against the wall"
Saeb Erekat, chief Palestinian negotiator
Saeb Erekat, chief Palestinian negotiator, welcomed the idea of monitors in the occupied territories.
He referred to the weekly demonstration against Israel's separation barrier in the West Bank town of Bilin, where troops often clash with protesters.
"The presence of international human rights monitors will really strengthen the non-violent movement and peaceful movement the Palestinians are leading against the wall," he said.
Khan said that during her tour she was struck by the sense of despair and pessimism among Israelis and Palestinians.
On Saturday, she toured Beit Hanoun, a Gaza town on the border with Israel. Last month, 19 members of an extended family were killed by Israeli artillery fire on the town.
However, Khan said she believed that Israeli troops had fired recklessly in civilian areas, not just in Beit Hanoun, but also when aiming missiles at wanted militants moving in densely populated areas.
"Even though [the Israeli army takes] precautions, for them this is war. They see these incidents as part of collateral damage. We believe there needs to be a rethinking of strategy, where there are such heavy civilian casualties," she said.
Captain Noa Meir, an Israeli army spokeswoman, defended the army's tactics.
"We target only terrorists. Unfortunately the terrorists choose to operate from within civilian areas. Therefore the responsibility for acting in these areas should fall on them," she said.
She also accused Palestinian groups of "firing purposely and indiscriminately at Israeli civilians".
In June, after an Israeli soldier was captured by Hamas-allied fighters, Israel carried out a series of military strikes in Gaza, killing more than 300 Palestinians.
Five Israelis have been killed during the Gaza offensive - three soldiers in Gaza and two civilians hit by Palestinian rocket fire on Israel.