Hamas' supreme leader today called off a ceasefire with Israel and militants threatened to attack Americans after 18 members of a family, including eight children, were killed in an Israeli artillery barrage on a densely populated neighbourhood.
The bloodshed constituted the highest civilian death toll among Palestinians since fighting erupted six years ago and undermined Palestinian President Mahmoud Abbas' attempts to form a more moderate government and renew a peace process with Israel.
Abbas condemned the "terrible, despicable crime" and the international community harshly criticised the deaths. Israel, promising a swift investigation, expressed regret for harming civilians.
The shelling occurred this morning as residents were sleeping in the northern Gaza town of Beit Hanoun, the focus of a week-long military offensive aimed at stopping rocket fire.
Israeli troops had pulled out of the town just 24 hours earlier.
The shells landed around a compound of four apartment buildings on a small side street.
The explosions left gaping holes in the structures, owned by four brothers from the al-Athamna family, and sent panicked residents scurrying outside.
Additional salvos landed, hitting the people and flooding a dusty alleyway in a pool of blood.
"Shells were fired directly onto the people who were rushing out of the house," said Akram al-Athamna, a relative of the victims. "There was blood everywhere."
Another family member, Asma al-Athamna, 14, said she saw her mother, older sister and brother-in-law die as they fled their home. "I was behind them and I was wounded," the weeping girl said from her hospital bed as she cradled her two-year-old niece, who was struck in the face by shrapnel.
The family is prominent in Beit Hanoun and includes several doctors and professionals.
Family members said they had fled during the Israeli offensive, returning home after yesterday's pullout.
Bits of dismembered bodies were plastered to walls of the damaged buildings and lying on the ground. A woman's headscarf, children's boots and slippers, and a pair of jeans, all burned, were strewn outside.
Weeping relatives gathered outside the homes. One man dipped his hand in victims' blood and smeared it all over his face. "God avenge us, God avenge us," he wailed.
A young man, standing in the bloodied alleyway, said an infant girl had been blown to pieces. "I tried to look for her head, I tried to look for her head," he shrieked, then sank to the ground, weeping.
Health workers said some 60 people were wounded, including 26 minors.
In Damascus, Syria, Khaled Mashaal, the exiled leader of Hamas, said the group would no longer honour a February 2005 truce and called for renewed attacks on Israel. He urged other militant groups to join the struggle.
"The armed struggle is free to resume, and the resistance is dictated by local circumstances," he told a news conference. "There must be a roaring reaction so that we avenge all those victims."
Other major militant groups pledged to follow suit.
The declarations raised the prospect of a new wave of suicide bombings and large-scale fighting with Israel. Although violence has persisted since the truce declaration, including the kidnapping of an Israeli soldier by Hamas-linked militants in June, there has been a sharp drop in fighting.
Hamas has not carried out a suicide bombing since August 2004, after killing scores of Israelis in such attacks over the previous four years.
Despite the tough rhetoric, Hamas would be taking a large gamble by resuming large-scale violence.
The group won legislative elections earlier this year and has been struggling to win international legitimacy. Already boycotted by the US, Europe and Israel, Hamas would risk further international isolation.
Perhaps with this in mind, Hamas leaders in Gaza quickly distanced themselves from a call by the group's military wing for Muslims around the world to strike at "the American enemy". Hamas has historically confined its attacks to Israeli targets.
Israeli Prime Minister Ehud Olmert expressed regret at the loss of civilian life and offered humanitarian aid.
"The unintentional tragedy that happened today in Beit Hanoun is one that the Israel Defence Forces will investigate to make sure that such events do not recur," said Miri Eisin, Olmert's spokeswoman.
She said, however, that Israel would press on with its efforts to halt Palestinian rocket attacks. She also dismissed the latest Hamas threats, saying militants have continually tried to attack Israelis.
Six rockets landed in Israel today, lightly wounding two people, the army said.
Defence Minister Amir Peretz ordered the army to complete its investigation by this evening.
Initial findings showed that the army had fired artillery at a target some 500 metres away from the residential area.
"Our estimate is that it was something connected with the aiming devices, or the alignment, or the balance between them, or our radar's location of the shell hit," Major General Yoav Galant, head of Israel's southern command, told Channel 2 TV.
"Our investigation is concentrating on these points," he said.
In Gaza, Palestinian President Mahmoud Abbas said the killings jeopardised peace prospects.
"We tell the Israelis: 'You are not seeking peace at all, but are destroying all chances for peace. You must therefore bear all the consequences of these crimes,'" he told Palestine TV.
However, Abbas also criticised the Palestinian rocket launchers, saying they invited tough Israeli reprisals.
"We are against those that justify Israeli actions," he said. Hamas angrily accused Abbas of caving in to Israeli pressure.
After the attack, Prime Minister Ismail Haniyeh of Hamas suspended talks with Abbas on forming a coalition government.
Abbas has been pushing Hamas to join his Fatah movement in a moderate unity government in hopes of ending a painful international aid boycott against the Palestinian government.
But later, in a rare gesture of unity, the two rival leaders visited victims in a Gaza hospital together and donated blood. Both men also declared three-day mourning periods throughout the West Bank and Gaza.
The civilian deaths drew swift condemnations around the world. France and Russia warned of an escalation of hostilities, and British foreign secretary Margaret Beckett,said: "It was hard to see what this action was meant to achieve and how it can be justified."
White House spokesman Gordon Johndroe said the Bush administration deeply regretted the loss of life. "We call on all parties to show restraint so as to avoid any harm to innocent civilians," he said.
Spontaneous demonstrations erupted across Gaza and the West Bank. Black smoke billowed into the skies of northern Gaza as protesters set tires ablaze. A mass funeral was expected tomorrow.
Israeli police, fearing revenge attacks, stepped up their alert level, mobilising forces across the country.
In separate fighting today, Israeli troops killed four Palestinian militants in northern Gaza.
In the West Bank, Israeli forces ambushed a group of Palestinian gunmen, killing four militants. A 30-year-old civilian also died in the shootout.