The Israeli army confirmed its operations in northern Gaza, with the Israel Army Radio reporting that five soldiers were lightly or moderately wounded in the fighting.
Witnesses said the Jabaliya deaths occurred as a result of gun battles between Palestinian fighters and Israeli soldiers.
Tariq Dardouna, a Palestinian resident trapped in his house in east Jabaliya, told Al Jazeera that Israeli forces targeted civilians.
"The Israeli army opens fire at everything in our area, including children and houses. There are injured children bleeding inside their houses," Dardouna said.
"They are opening fire at everything."
Witnesses also reported clashes in the nearby Tufah neighbourhood in northern Gaza City.
Khaled Meshaal, the exiled Hamas leader living in Syria, denounced the Israeli attacks against Gaza civilians as "the real holocaust".
Sami Abu Zuhri, a spokesman for Hamas, described the Jabaliya assault as "genocide".
He accused "regional and internal parties" of being involved in the conflict, as well as an "Israeli conspiracy".
In Ramallah, Mahmoud Abbas, the president, condemned the escalating Israeli military operation in Gaza, and called for its immediate end.
"It's very regrettable that what is happening is more than a holocaust. We tell the world to see with its own eyes and judge for itself what is happening and who is carrying out international terrorism," Abbas later told reporters.
Comparisons to a "holocaust" apparently refer to remarks made by Matan Vilnai, Israel's deputy defence minister, who earlier used the Hebrew word "shoah" - generally used about the Nazi Holocaust - in remarks to army radio on Friday.
"By intensifying the rocket fire and extending their reach [fighters in Gaza] are bringing onto themselves a worse catastrophe [shoah] as we will use all means to defend ourselves," Vilnai said.
In his press conference, Abbas said: "It is regrettable that Israel uses this word, banned for more than 60 years, the word 'holocaust,' and we demand that the world respond."
An Israeli army spokeswoman said about 20 rockets were fired into Israel on Saturday, including three Soviet-designed Grad missiles, which are more powerful and accurate than locally produced Qassams.
Three Israelis were injured by rockets that reached Ashkelon, a major southern city with a population of 120,000 people.