Scores of Palestinians have died after Israeli troops, backed by tanks and warplanes, escalated their ground offensive in Gaza City.
The fighting against Hamas militants, including heavy Israeli tank fire, has left at least 65 people dead, forced thousands to flee and damaged or destroyed dozens of homes.
Palestinian health officials reported at least 65 people killed as air and artillery strikes echoed across the city for hours. They put the number of displaced at 35,000.
At least 420 Palestinians and seven Israelis have died in the near two-week conflict which escalated as UN chief Ban Ki-moon headed to the region to try to revive ceasefire efforts.
US Secretary of State John Kerry, meanwhile, said he expects to arrive in the Middle East in coming days and that he support's Egypt's call for an immediate cease-fire, rejected last week by Hamas.
The Islamic militants say they want guarantees that Gaza's border blockade will be eased before agreeing to stop fighting.
Mr Kerry told NBC's Meet The Press programme that he is siding with Egypt, saying that "you cannot reward terrorism," referring to Hamas.
Sunday's battle in Gaza City's Shijaiyah neighbourhood was the deadliest so far in Israel's three-day-old ground offensive, which followed 10 days of heavy airstrikes on targets linked to Gaza's Hamas rulers.
Israel has said it had sent thousands of troops into Gaza to destroy Hamas rocket launchers and tunnels dug by the Islamic militants to sneak into Israel.
The Israeli military said 8% of more than 1,700 rockets fired at Israel since July 8 came from Shijaiyah.
Local residents said Israeli tanks entered after midnight and fired heavily.
"The gate of hell has opened, and shrapnel came through the windows," Shijaiyah resident Jawad Hassanain said by telephone.
He said he and his family sought shelter in a nearby building after their house shook from the explosions.
"From 12.30am until 4am, all you could hear is heavy bombardment, the smell of fire and the smell of death. By 4.30am, and after the call for the prayer, we were able to get in an ambulance," he added.
After daybreak, dozens of wounded from Shijaiyah were rushed to Gaza's central Shifa Hospital. Frantic parents carried children bloodied by shrapnel, and the emergency room quickly overflowed, forcing doctors to treat some patients on mattresses in a hallway.
During a brief Red Cross-brokered lull, paramedics entered the neighbourhood to retrieve the dead, pulling bodies from the rubble of homes.
Dozens of houses over several blocks were destroyed or badly damaged, a scene reminiscent of Israel's last major incursion into Gaza more than five years ago when large areas near the border with Israel were devastated.
Palestinian health officials said at least 65 people were killed and 288 wounded in Shijaiyah, bringing the overall Palestinian toll since July 8 to 425 dead and some 3,000 wounded. Close to half of the dead were killed since the start of the ground offensive.
Seven Israelis also were killed, including five soldiers, the military said. Dozens of soldiers have been wounded since the start of the ground operation, according to Israeli hospitals.
Lt. Col Peter Lerner, a military spokesman, said the military met a "huge" level of resistance from Hamas militants in Shijaiyah, with anti-tank missiles, rocket-propelled grenades and automatic weapons fired from houses and buildings.
He said that so far, 10 tunnel access shafts were found in the area.
Lt Col Lerner said Shijaiyah had been a main rocket-launching area and that were warned ahead of the offensive to leave the area.
"We are mobilising in order to strike Hamas where it hurts," he said.
Israel said Hamas' network of tunnels are a highly-developed web which links rocket building, maintenance and launching sites and stretches well into Israel.
Israel has also targeted the homes of Hamas leaders, warning they would pay a high price.
Among those killed in Shijaiyah were a son, daughter-in-law and two grandchildren of Khalil al-Haya, a senior leader of the group.
They were killed at the time of dawn prayers, Health Ministry official Ashraf al-Kidra said.
Hamas' military wing said the cause of death as an airstrike on the family. Israel's military had no immediate comment.
Khalil al-Haya promised to avenge his son.
"We promise you, my people, a brilliant victory," he told a local Hamas radio station.
"The blood of my son and the martyrs will not be wasted and resistance will continue."
Thousands of residents began fleeing Shijaiyah after daybreak, including a woman in a wheelchair who waved a white flag.
Columns of smoke rose from the neighbourhood as the sound of shelling echoed from inside.
A man walking in the street said his son was trapped in the family house and that he needed someone to help rescue him. He then got into an ambulance to reach his house, but tank-fire hit nearby and the ambulance quickly turned around to get away.
Gaza's health ministry later said 35,000 people fled Sunday's fighting.
Some residents tried to find refuge with relatives or at UN schools.
Some 63,000 Palestinians are already staying in United Nations shelters, according to UNRWA, the UN refugee agency for Palestinians.
The number of people who have fled their homes has more than tripled since the start of Israel's ground operation and the agency said it planned to open more schools.
In the southern town of Khan Younis, an airstrike targeted the home of a field commander of another militant group, Islamic Jihad.
The man survived, but the strike killed his 15-year-old daughter and three others, according to the Palestinian Red Crescent.
The heavy fighting came as UN Secretary General Ban Ki-moon headed to Qatar to try to push stalled ceasefire efforts forward.
He was set to meet Western-backed Palestinian president Mahmoud Abbas in the Gulf state, Mr Abbas' spokesman said. Mr Abbas also plans to meet Hamas' top leader, Khaled Mashaal.
Hamas last week rejected an Egyptian call on both sides to halt hostilities, saying it first wants guarantees that Israel and Egypt will significantly ease their border blockade of Gaza, which has been ruled by the Islamic militant group since 2007.
Hamas has sought involvement of other countries, such as Qatar, in any ceasefire negotiations. The militant group is deeply distrustful of Egypt's rulers, who last year deposed a Hamas-friendly government in Cairo.
Meanwhile, the Organisation of Islamic Cooperation, which represents 57 Muslim-majority nations, condemned Israel's offensive and urged the UN Security Council to take immediate action.
Hamas spokesman Mushir al-Masri in Gaza claimed tonight his group had captured an Israeli soldier. An announcement on Gaza TV of the soldier's capture set off celebration in the streets of Gaza City.
But the claim could not immediately be verified and the Israeli military said it was investigating the report. Hamas has made similar claims of capturing Israelis in the past that were not ture.
For Israelis, a captured soldier would be a nightmare scenario. Hamas-allied militants seized an Israeli soldier in a cross-border raid in 2006 and held him captive in Gaza until Israel traded more than 1,000 Palestinian prisoners, some of whom were involved in grisly killings, for his return in 2011.