The health ministry said Saturday's attack on the school in Al-Nuseirat killed at least 16 and wounded more than 50.
The Israeli military said it took precautions to minimise risk to civilians before it targeted the gunmen who were using the area as a hideout to plan and carry out attacks against soldiers.
Hamas denied its fighters were there.
At the scene, Ayman al-Atouneh said he saw children among the dead. "We came here running to see the targeted area, we saw bodies of children ... this is a playground, there was a trampoline here, there were swing-sets, and vendors."
Mahmoud Basal, spokesman of the Gaza Civil Emergency Service, said in a statement that the number of dead could rise because many of the wounded were in critical condition.
The attack meant no place in the enclave was safe for families who leave their houses to seek shelters, he said.
Al-Nuseirat, one of Gaza Strip's eight historic refugee camps, was the site of stepped-up Israeli bombardment on Saturday. An air strike earlier on a house in the camp killed at least 10 people and wounded many others, according to medics.
In its daily update of people killed in the nearly nine-month-old war, the Gaza health ministry said Israeli military strikes across the enclave killed at least 29 Palestinians in the past 24 hours and wounded 100 others.
Among those killed in separate air strikes on Saturday were five local journalists, raising the toll of journalists killed since October 7 to 158, according to the Hamas-led Gaza government media office.
Gaza health authorities say more than 38,000 Palestinians have been killed in Israel's offensive. The health ministry does not distinguish between combatants and non-combatants but officials say most the dead are civilians.
Israel has lost 323 soldiers in Gaza and says at least a third of the Palestinian dead are fighters.
Israel launched its offensive, aimed at eliminating the militant Islamist group Hamas, in response to a Hamas-led assault on Israel on Oct. 7 in which 1,200 people were killed and over 250 taken hostage, according to Israeli tallies.
Rafah operations
Israeli forces, which have deepened their incursions into Rafah, in the south of the enclave near the border with Egypt, killed four Palestinian policemen and wounded eight others, in an air strike on their vehicle on Saturday, health officials said.
A statement issued by the Hamas-run interior ministry said the four included Fares Abdel-Al, the head of the police force in western Rafah neighbourhood of Tel Al-Sultan.
The Israeli military said forces continued "intelligence-base operations" in Rafah, destroyed several underground structures, seized weapons and equipment, and killed several Palestinian gunmen.
Israel has said its operations in Rafah aim to eradicate the last Hamas armed wing battalions.
The Israeli military said it eliminated a Hamas rocket cell in Deir Al-Balah in central Gaza that operated from inside a humanitarian-designated area. It said it carried out a precise strike after taking measures to ensure civilians were unharmed.
The armed wings of Hamas and the Islamic Jihad said fighters attacked Israeli forces in several areas of Gaza with anti-tank rockets and mortar bombs.
Hamas accepts hostage proposal
Hamas has accepted a proposal by the United States to begin talks on releasing Israeli hostages, including soldiers and men, 16 days after the first phase of an agreement aimed at ending the Gaza war, a senior Hamas source told Reuters on Saturday.
The militant Islamist group has dropped a demand that Israel first commit to a permanent ceasefire before signing the agreement, and would allow negotiations to achieve that throughout the six-week first phase, the source told Reuters on condition of anonymity because the talks are private.
A Palestinian official close to the internationally mediated peace efforts had said the proposal could lead to a framework agreement if embraced by Israel and would end the nine-month-old war between Israel and Hamas in Gaza.
US Central Intelligence Agency Director William Burns will travel to Qatar next week for negotiations, a source familiar with the matter said. A CIA spokesperson declined to confirm Burns’ trip in line with its policy of not disclosing the spy chief’s travels.
The source, who spoke on condition of anonymity, said the discussions would focus on resolving a Hamas demand that the US, Israel, Qatar and Egypt guarantee in writing a temporary ceasefire, aid deliveries and an Israeli troop withdrawal if indirect talks on implementing the second phase of the plan continued.
A source in Israel's negotiating team, speaking on condition of anonymity, said on Friday there was now a real chance of achieving agreement. That was in sharp contrast to past instances, when Israel said conditions attached by Hamas were unacceptable.
A spokesperson for Israeli Prime Minister Benjamin Netanyahu did not immediately respond to a request for comment on Saturday, the Jewish Sabbath. On Friday his office said talks would continue next week and emphasised that gaps between the sides still remained.
A US official declined to confirm the Hamas decision, adding, "There's real progress, but still a lot of work to do."
