At least 17 people were killed when Israeli warplanes fired on a packed Gaza market Wednesday in a deadly raid which came as Israel was observing a four-hour humanitarian lull.

Thick black smoke billowed over the site in the war-torn Shejaiya neighbourhood as at least five ambulances raced to the scene where bodies lay strewn on the ground, an AFP correspondent said.

A bloodied, limp lifeless body lay in a pool of petrol and mud, his head crushed, one of at least 17 people who were killed. At least 200 were wounded, medics said.

It was supposed to have been a rare pause for Gaza's battered population of 1.8 million to go out in safety to stock up on goods, and for medics to evacuate the dead and wounded.

Instead, there was further bloody mayhem with more than 30 people killed across Gaza in the first three hours alone, sending the death toll from 23 days of unrelenting Israeli attacks soaring above 1,300.

Israel had said that its truce, which began at 1200 GMT, would not apply in places were troops were "currently operating" just hours after the army made what a "significant advance" into the narrow coastal strip.

Hamas denounced the four-hour lull as a publicity stunt, saying it had "no value".

The strike on the market came hours after Israeli tank shells slammed into a school sheltering more than 3,000 homeless people, killing 16 and drawing a furious response from the UN agency for Palestinian refugees (UNRWA).

It was the second time in a week that a UN school housing refugees had been hit, and UNRWA Commissioner General Pierre Krahenbuhl lashed out at Israel.

- 'End the carnage' -

"I condemn in the strongest possible terms this serious violation of international law by Israeli forces," he said, indicating the school's location in the Jabaliya camp had been communicated to the Israeli army 17 times.

"No words to adequately express my anger and indignation," he wrote on his official Twitter account, saying that 3,300 people had been sheltering there at the time.

"I call on the international community to take deliberate international political action to put an immediate end to the continuing carnage," he said.

Israeli tank shelling and air strikes killed at least 100 Palestinians and wounded hundreds on Wednesday, medics said.

And in Israel, the army said three troops had been killed in Gaza, raising the overall number of soldiers killed to 56 since the operation began on July 8.

Situated on the Mediterranean coast, flanking Israel and Egypt, the Gaza Strip is home to 1.8 million Palestinians who live in an area of just 362 square kilometres (140 square miles).

It is one of the most densely populated areas in the world, a fact that was not lost on the influential British band Massive Attack.

"This bombardment of an area that is one of the most densely populated on earth, where civilians aren't allowed to leave, is just beyond belief," frontman Robert Del Naja told AFP in Lebanon where he dedicated the band's Middle East gig to the children of Gaza.

"In order to protect yourself, do you really want to massacre another people?" he asked in a question directed at Israel.

- Nowhere safe -

"They're bombing houses, homes, schools -- there's no protection," said Moin al-Athamna, one of those who had been staying at the Jabaliya school when the attack occurred.

Inside one classroom, two young men wearing Palestinian boy scout scarves were engaged in the grisly task of collecting body parts. Their ungloved hands were completely stained with blood as they picked up chunks of flesh and put them into thin plastic bags.

"They were all kids in there, young people," said Hisham al-Masri. "Why would they do this? Where can people go?"

International efforts to end the bloody conflict have so far led nowhere, with current efforts focused on a top-level Palestinian delegation, including Hamas and Islamic Jihad leaders, which was expected in Cairo in the coming days to discuss a new truce proposal.

In Tel Aviv, Israel's security cabinet was also locked in discussions over an Egyptian truce initiative, army radio said.

Palestinian president Mahmud Abbas had spoken to exiled Hamas chief Khaled Meshaal and proposed the 24-hour truce, which the Hamas chief had "agreed", senior official Nabil Shaath told AFP.

But a Hamas spokesman denied agreeing to any new truce, saying they first wanted "an Israeli commitment" and its military chief Mohammed Deif said there would be no ceasefire without Israel lifting its eight-year blockade on Gaza.