GAZA (Reuters) - Israeli shelling killed more than 40 Palestinians on Tuesday at a U.N. school where civilians had taken shelter, medical officials said, in carnage likely to boost international pressure on Israel to halt a Gaza offensive.
The Israeli army accused Hamas of using civilians as "human shields" and said its troops had fired mortars at the premises after gunmen mortared their positions from inside al-Fakhora school in Jabalya refugee camp.
Citing intelligence reports, it named two men it said were Islamist gunmen killed in the attack. A spokesman said the army did not know how many others died.
People cut down by shrapnel lay in pools of blood in the street. Witnesses said two shells exploded outside the school, killing at least 42 civilians and wounding dozens among people who had taken refuge there and residents of nearby buildings.
Within hours, Egypt, backed by France and other European powers, proposed an immediate ceasefire and talks that could address Israel's demands that Hamas be starved of rockets and other weapons smuggled over the Egyptian border.
Egyptian President Hosni Mubarak and French President Nicolas Sarkozy made the move at a joint news conference. There was no immediate response from Israel or from Hamas.
As bitter combat on the ground went into a fourth day after a week-long aerial bombardment, the bloodshed took Palestinian deaths in 11 days of violence to over 600.
They also prompted U.S. President-elect Barack Obama to break his silence on the offensive, to say the loss of life among civilians was "a source of deep concern" for him.
As momentum gathered behind a European truce plan that could starve Hamas of arms, the outgoing Bush administration said it wanted an "immediate ceasefire."
But it stressed conditions that have characterized the distance between the United States, Israel's close ally, and European and Arab demands for an instant halt to the offensive.
Obama, who takes over from George W. Bush on January 20, said he would not engage in policy until he was in office but vowed to work rapidly thereafter to secure peace in the Middle East.
Some commentators have said the U.S. presidential transition has exposed the United States to greater risks from Israel's action in Gaza. Al Qaeda second-in-command Ayman al-Zawahri called on the Internet for Muslims to "hit the interests of the Zionists and Crusaders wherever and in whichever way you can."
Washington's allies in Arab governments have condemned the Israeli assault, which has contributed to rising oil prices, and the always vocally anti-American Venezuelan President Hugo Chavez, another OPEC member, called it a "Holocaust."
A fourth day of a ground assault, launched after a week of air strikes, still failed to end Hamas rocket salvoes, which again caused damage and some injury in southern Israel.
Families huddled for shelter in homes and schools, where classes have been halted, and explosions and gunfire crashed and rattled along the 40-km strip of Mediterranean coast all day.
A senior U.N. official in Gaza said 350 people had been sheltering at the Fakhora school and the United Nations regularly gave the Israeli army exact geographical coordinates of its facilities to try to keep them safe from attack.
Israeli Foreign Minister Tzipi Livni said: "Unfortunately, (Hamas fighters) are hiding amongst civilians." She added that Israel was trying to avoid civilian casualties.
The army's chief spokesman said: "Hamas and its senior commanders are turning their citizens into bulletproof vests for their personal use." His office released video which it said showed gunmen firing from another U.N. school in Gaza in 2007.
The deaths in Gaza, home to 1.5 million, raised to 77 the number of Palestinian civilians killed on Tuesday, medics said.
The spike in civilian casualties could prove to be a turning point in Israel's "Operation Cast Lead," launched on December 27 with the declared aim of removing the Hamas rocket threat.
The killing of 28 unarmed Lebanese in Israeli bombing in the village of Qana in the 2006 Lebanon war drained foreign support for its campaign against Hezbollah guerrillas.
International efforts already under way to end the fighting have focused on securing a deal that would meet Israel's demand that Hamas, an Islamist group elected in 2006 and now in sole charge of the Gaza Strip, could not rearm once hostilities end.
"If there is an end to terror, an end to the smuggling of ammunition from Sinai to Gaza, the Israeli fighting will stop," Israeli Prime Minister Ehud Olmert said, referring to arms Hamas obtains through tunnels under the Gaza-Egypt border.
In fighting on Tuesday, Israeli forces pushed into the southern town of Khan Younis and battled Hamas militants on the outskirts of the city of Gaza.
According to the Palestinian Health Ministry in the Gaza Strip, at least 631 Palestinians have been killed and more than 2,700 wounded since Israel began its offensive.
Ten Israelis, including three civilians hit by rocket fire, have been killed in the conflict. At least five rockets landed in Israel on Tuesday, including one that hit the town of Gadera, 28 km (17 miles) from Tel Aviv. A three-month-old baby was hurt.
In Gaza, an infant of similar age was among children killed.
A senior Israeli official, speaking before Sarkozy and Mubarak's statements, were pursuing "a serious initiative" for a ceasefire. Talks were focusing, the official said, on the size of an "international presence" along the Gaza-Egypt border.
Tony Blair, the Middle East envoy of major powers sponsoring Israeli-Palestinian peace talks, said Sarkozy, the European Union and the United States were all in agreement that new anti-smuggling measures would be needed to clinch a ceasefire.
Hamas, which has rebuffed Western demands to recognize Israel, end violence and accept existing interim peace deals, has demanded a lifting of the blockade of the Gaza Strip in any future ceasefire. It seized the territory in 2007, 18 months after it won a Palestinian parliamentary election.
Most of the deaths reported by Gaza hospitals in recent days have been civilians. The Israeli military said it killed 130 militants since it began the ground assault, a figure that suggested the total Palestinian death toll might be close to 750 and that bodies could still be on the battlefield.
Many of the Gaza Strip's 1.5 million people lack food, water or power. In southern Israel, schools remained closed and hundreds of thousands of people have been rushing to shelter at the sound of alarms heralding incoming rockets.