Palestinian hospital officials said there were several more injured. According to witnesses, all those killed were women and children.
Hundreds gathered outside the Kamal Adwan hospital weeping as bodies arrived. Witnesses said that many of the dead arrived in their sleeping clothes.
Four hospitals were treating the wounded across Gaza.
Khaled Radi, a Health Ministry official, said of the 18 dead, seven were children, 13 of those killed belonged to the same family.
Radi said at least 40 people were wounded, all civilians. Palestinian security officials said that five tank shells landed in the area within 15 minutes.
The Israeli army did not comment.
Palestinian president Mahmud Abbas condemned a "terrible Israeli massacre" after the 18 Palestinian deaths and called for an emergency UN Security Council meeting.
It was a call echoed by Palestinian Prime Minister Ismail Haniya.
"I call on the Security Council to hold an emergency meeting to stop these massacres against the Palestinian people in Gaza and the West Bank," the prime minister told reporters shortly before an urgent meeting of his cabinet.