Hamas said nine of its fighters were killed in clashes at the al-Bureij and neighbouring Nusseirat refugee camps while hospital officials said three boys, aged eight, 12 and 15, were among the dead.
Witnesses said around 30 tanks and jeeps, with aerial cover from two Apache helicopters, secured the entrance of the Bureij camp in central Gaza at around 3:00 am (Local time).
After marksmen took over several tall buildings at the entrance to the camp, the army announced a curfew by loudspeaker and told residents to stay indoors.
Residents said some 1,500 people then surged to the entrance where fierce clashes broke out. Later, Nusseirat residents joined them pelting missiles and explosives on troops, triggering exchanges of fire.
Palestinian and Israeli sources said anti-tank missiles, rocket-propelled grenades, Molotov cocktails and stones were hurled at the troops, without causing injuries among the Israelis.
The Palestinians were all killed by live Israeli fire, the medical sources said. The nearby hospital at Deir al-Balah was overrun with casualties and victims were to be packed up to four at a time into ambulances sent from Gaza City's al-Shifa hospital some 12 kilometres away.
In a statement confirming the end of the operation, the Israeli army said its aim was "to prevent terrorist attacks carried out against Israeli targets, including planting explosive devices and firing anti-tank missiles."
Hamas said six members of its armed wing, the Ezzedine Al Qassam Brigades, were killed in Nusseirat while another three were killed in Bureij.
Israeli Army's Chief of Staff, General Moshe Yaalon said "other offensive operations" would be launched as part of a recent intensification.
Palestinian negotiations minister Saeb Erakat condemned Sunday's operation as "a dangerous escalation".
"The Israeli government is continuing its policy which is aimed at destroying the peace process. The issue is not withdrawal from the Gaza Strip but destroying the Gaza Strip," he said.
Later, furious Palestinians attending the mass funeral held for victims vowed to carry out retaliatory strikes in the heart of Israel.
A crowd of more than 10,000 gathered to pay their last respects to those killed in the early-morning operation at the Nusseirat and neighbouring Bureij refugee camps as they were buried in a nearby cemetery.
Scores of masked, gun-toting militants mingled among the crowds who chanted: "Revenge, revenge" and "Our answer will be in Tel Aviv", an AFP correspondent reported.
Ismail Haniya, a leader of Hamas in Gaza, said the killings would "not pass without punishment."
"This massacre will only make our people stronger and more determined to continue the resistance," he added.