"This must stop immediately," Mr Annan said, in the region as part of his Middle East tour. "The closure of Gaza must be lifted, the crossing points must be opened."
"Two hundred Palestinians have been killed since the end of June," Mr Annan told a news conference with Palestinian President Mahmud Abbas in Ramallah.
He also called for a "cessation" of the Qassam rockets fired by militants, and for Israel to release Palestinian parliamentarians and officials from the Hamas-led government arrested in the West Bank in late June.
"The creation of a Palestinian state living side by side with Israel is the key to solving the problems in this troubled region," Mr Annan added.
No security
President Abbas, whose moderate Fatah party is working towards a possible national unity government with the governing party Hamas, warned there could be no security until Israel ends its occupation and a Palestinian state emerges.
"Continued occupation of the Arab and Palestinian territories will not achieve peace," he said.
After his meeting with the UN Secretary General Mr Abbas called on the international community to “halt Israeli aggression” after nine Palestinians were killed by Israeli troops.
Eight died in the Shejaiya neighbourhood of Gaza City, including a teenage boy shot in the chest, two men in their thirties also shot and five others who died from tank fire, medical officials said.
Israeli soldiers have been operating in the area as part of a wider assault designed to retrieve a captured soldier and fight militants.
Witnesses later told AFP that Israeli troops pulled out of Shejaiya at dawn Thursday and returned to Israel.
"Israeli forces have returned to their bases after having achieved their mission in Shejaiya," an Israeli army spokeswoman told AFP.
Palestinian medical sources said most of those killed on Wednesday were civilians, but the Israeli army said its troops only opened fire in response to attacks, admitting that its forces were coming under heavy attack.
"I know of four different incidents in which gunmen either fired anti-tank missiles or they were approaching the forces," an Israeli army spokeswoman told news agency AFP.
The Israeli army said it had discovered a large tunnel, 13 metres deep and 150 metres long, running from a house in Shejaiya towards the Karni crossing, "The tunnel was meant to be used for an attack on the terminal," a spokesman said.
The said troops were operating in Shejaiya to "destroy terror infrastructure" and that everything the military does in the Gaza Strip is to create the right conditions for the return of kidnapped Israeli soldier Gilad Shalit.
National unity
The Palestinian President also met with the territory’s Hamas prime minister, Ismail Haniya, for talks on a constitution for a government of national unity.
An official said that the meeting also discussed the situation in the Gaza Strip. The two men will meet again, for further talks, Thursday.
Mr Abbas had earlier renewed calls for militants to stop firing rockets into Israel, warning that they were sowing "death and destruction" for Palestinians.
Five Israelis have died as a result of homemade rockets fired from Gaza since the start of the second Palestinian uprising in September 2000, most of the missiles cause property damage or land in open spaces.
Meanwhile, in the occupied West Bank, the head of the armed wing of the Islamic Jihad faction, Hossam Jaradat, has died from wounds sustained during an Israeli operation on August the twenty third.
Mr Jaradat, whom Israel held responsible for many attacks against the Israel, suffered head wounds and had been in a critical condition.
Militant leader killed
Security and medical services said the Israeli Army killed Thursday the leader of the Al-Aqsa Martyrs Brigade in the West Bank town of Nablus.
Fadi Qafisheh, 29, was killed in Nablus' old town in an exchange of fire with Israeli soldiers.
Four other members of the radical group, seen as the loosely affiliated armed wing of Palestinian President Mahmud Abbas's moderate Fatah party, were wounded, said the sources.
Jordan, Syria talks
Mr Annan will hold talks with Jordan today before travelling to Damascus to press Syria to help stop arms smuggling across its border.
The trip to Syria poses the biggest challenge of the two for Mr Annan because Israel is demanding UN peacekeepers in Lebanon join the Lebanese army in policing the border to prevent weapons reaching the Lebanese Hezbollah guerrilla group.
Mr Annan, will go to Damascus knowing Syria - Hezbollah's main backer along with Iran - has said it would consider such a deployment a hostile act.
Analysts say Lebanon is resisting Israel's demand for fear of antagonising Syria, which has threatened to close the border.
Italian Foreign Minister Massino D'Alema, whose country has promised the most UN peacekeepers, yesterday said the international community would "not stand by and watch" if Syria sent arms to Lebanon, Italy's Ansa news agency reported.
Later, Mr Annan told French radio that the Israeli army will pull out of southern Lebanon once 5,000 UN peacekeepers and 16,000 Lebanese troops have been deployed.
"That is what I have just been discussing with the Israeli government," Mr Annan said when asked whether 5,000 UN peacekeepers would be a sufficient force to persuade the Israeli army to withdraw from southern Lebanon.
"We agreed that with 5,000 UN troops and 16,000 Lebanese soldiers who will go down south, it would be a credible force to allow the Israelis to pull out entirely,” he said on Europe 1 radio.
Rally for captive soldiers
The families of three Israeli soldiers held captive by Palestinian and Lebanese militants are to lead a rally in support of the missing men on Thursday in Tel Aviv.
"We appeal for massive participation in this demonstration of solidarity," Karnit Goldwasser, the wife of one of two soldiers snatched by Lebanese Hezbollah guerrillas in July, told the Yediot Aharonot newspaper.
Ehud Goldwasser and Eldad Regev were captured on July 12, while Gilad Shalit was captured by Palestinian militants on June 25.
End Lebanon blockade
Earlier, the UN chief Kofi Annan had urged Israel to end its blockade of Lebanon, but his visit failed to extract any public promise for an immediate halt.
Mr Annan also demanded the release of two soldiers whose capture sparked the offensive against Hezbollah.
But Israeli Prime Minister Ehud Olmert said his country would only lift the blockade when UN peacekeepers and the Lebanese army were able to stop Hezbollah smuggling arms.
Mr Olmert nevertheless expressed hope for direct contacts with Lebanon, "We certainly hope the conditions will change rapidly in order to allow direct contact between the government of Israel and the government of Lebanon in order to hopefully soon reach an agreement between the two countries."
Lebanon and Israel have had no relations since Israel's creation in 1948, and according to Lebanese Prime Minister Fuad Siniora it is unlikely to occur now. Mr Siniora accusing Israel of crimes against humanity, on his country, and declaring that Lebanon would be the “last Arab country’ to make peace with Israel.
Prisoner exchange
Meanwhile, Hezbollah says it will only release two captured Israeli soldiers as part of a prisoner exchange with Israel.
“There is no unconditional release. It is not feasible… since the resistance captured to the Israeli soldiers (Hezbollah’s) position was clear," Lebanese Energy Minister Mohammed Fneish told a news conference.
The capture of the two soldiers in July sparked the five week military campaign in Lebanon.
Money pledges
The Israeli military campaign destroyed much of southern Lebanon and the European Commission has pledged an initial 42 million euros (A$70.7 million) to help kick-start reconstruction, according to Benita Ferrero- Waldner the commission’s External Relations Commissioner.
The money will be offered at a donors' conference in Stockholm, where Lebanese officials hope to raise a total US$500 million for short-term recovery work, such as clearing unexploded bombs, rebuilding homes and restoring roads.
Lebanese government officials estimate that the conflict created some US$3.6 billion in damage to infrastructure.