Gaza’s Hamas-run health ministry says an Israeli air strike killed at least 70 people in the Al-Maghazi refugee camp in the centre of the strip.
A spokesman said the death toll was likely to rise given the large number of families living in the area.
Dozens of injured people were rushed to nearby Al-Aqsa Hospital with footage showing some children’s faces covered in blood and body bags piled outside.
The Israeli military told the BBC it was looking into the report.
The health ministry says three houses were hit in the attack late on Sunday.
According to ministry spokesman Ashraf al-Qudra, a densely populated residential block was destroyed.
A father said he had lost his daughter and grandchildren, adding that his family had fled from the north for safety in central Gaza.
“They lived on the third floor of one of the buildings,” he said. “The wall collapsed on them. My grandchildren, my daughter, her husband – all gone.
“We are all targeted. Civilians are targeted. There is no safe place. They told us to leave Gaza City – now we came to central Gaza to die.”
In a statement to the BBC, the Israeli military said it had received “reports of an incident in the Maghazi camp”.
“Despite the challenges posed by Hamas terrorists operating within civilian areas in Gaza, the IDF [Israeli Defense Forces] is committed to international law including taking feasible steps to minimize harm to civilians,” it added.
According to the health ministry, more than 20,000 people have been killed – mostly children and women – and 54,000 injured in Gaza since 7 October, when Hamas and other Palestinian groups attacked Israel, killing 1,200 people and taking about 240 hostages.
Earlier on Sunday, Israeli Prime Minister Benjamin Netanyahu said the war had come at a “very heavy price” for his country.
The Israeli military said more than a dozen soldiers had been killed in Gaza since Friday, bringing the total for the ground offensive launched after 7 October to 154.
Saturday was one of its deadliest days but Mr Netanyahu said there was “no choice” but to keep fighting.
In another development, Pope Francis appealed for peace in the Middle East as he presided over a Christmas Eve Mass at Saint Peter’s Basilica in the Vatican.
Referring to the war between Israel and Hamas, the Pope said Jesus’s message of peace was being drowned out by the “futile logic of war” in the very land where he had been born.
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