Israeli forces have killed at least ten Palestinians, most of them children, after firing on a crowd of demonstrators in the Gaza Strip today.

The Israeli Army has begun a high-level inquiry into the incident in which at least 50 other people were wounded, some critically.

About 3,000 demonstrators in the Rafah refugee camp were protesting against an Israeli invasion of a neighbouring area, when there was a large explosion in the crowd.

Brigadier General Ruth Yaron, an Israeli army spokeswoman, said that Israeli forces fired warning shots, first a missile from a helicopter that hit an empty area, followed by machine-gun fire and four tank shells towards an abandoned structure.

"At this stage, it’s possible, that’s our assessment, that there were casualties as a result of the tank shells that were fired, " she said.

"We regret any loss of human life ... in the course of our efforts to defend ourselves," said Raanan Gissin, and adviser to Ariel Sharon, the Israeli Prime Minister.

President Bush urged "restraint" by both sides after today's attack, but once again stopped short of condemning the Israeli action.

Condemnation came instead from Brian Cowen, the Foreign Minister of Ireland which holds the rotating EU presidency. He rounded on the Israeli military for its "completely disproportionate" actions and its "reckless disregard for human life".

Despite the fatalities, senior military commanders decided to continue the operation in Rafah, which is expected to last for at least another week.

The latest attack means that at least 34 Palestinians have died in "Operation Rainbow", during which Israeli forces have sealed off and raided the Rafah camp over the last three days.

The massive invasion, the largest in the Gaza Strip in years, came less than a week after Palestinian militants killed 13 soldiers, seven in the Rafah area.

Four people, including an unarmed 14-year-old boy, were killed in the neighborhood today before the protest. A day earlier, 20 Palestinians were killed in fighting.

The Israeli military says that it is searching for weapons and smuggling tunnels and hunting militants.

Dr Moawiya Hassanain, the chief hospital spokesman in Rafah, said: "We cannot handle the situation, no hospital in the world can handle the situation," as beds ran out and calls for blood went up.

"I got instruction from President Arafat to mobilise all our teams to Rafah immediately and declare a state of emergency all over Gaza Strip hospitals."

Even before today’s strike, the offensive had drawn widespread international condemnation. The Bush Administration said that it was very concerned about today’s incident and called for "maximum restraint."

Israel's actions in Gaza were branded "unacceptable and wrong" by Tony Blair. The Prime Minister at Commons question time called for the Palestinians and Israelis to sit down together and try to move towards a negotiated settlement.

He said: "We entirely understand the concerns of Israel about acts of terrorism. But what happened yesterday was unacceptable and wrong.

He said that Israel needed to press on withdrawing from the whole of the Gaza and parts of the West Bank.

"We then need to allow the international community to help moderate Palestinians re-establish control and authority in those areas over which they will have control and authority. And we need, above all else, to begin a process that allows us to restart proper negotiations that lead to a final status settlement.

"That would happen far more easily if the terrorism stopped."

Mr Blair had been responding to two Labour backbenchers who had urged him to condemn Israel's actions in the area which Gerald Kaufman, MP for Manchester Gorton called "indiscriminate slaughter".