Israel says that 13 of its soldiers died since Saturday night, the biggest one-day loss for its army in years.
At least 87 Gazans were reported killed on Sunday - 60 of them in the district of Shejaiya alone. The total death toll in Gaza now stands at more than 425.
Hamas said on Sunday evening that it had captured an Israeli soldier, but this has not been confirmed by Israel.
Celebratory gunfire and shouts could be heard in Gaza City after the claim was made.
It brings the number of Israeli soldiers killed in the current offensive to 18.
The deaths of so many soldiers on a single day will shock Israeli society, the BBC's Chris Morris reports from southern Israel.
Israeli Prime Minister Benjamin Netanyahu vowed to continue operations in Gaza "as much as we need to" despite the casualties.
He said the Israeli government felt "deep pain" over deaths of its soldiers, and that Hamas, not Israel was responsible for the escalation in Gaza.
Palestinian President Mahmoud Abbas said the deaths in the Shejaiya district east of Gaza City were a "massacre".
The BBC's Yolande Knell, in Gaza City, says there have been scenes of panic in Shejaiya, with thousands of residents fleeing.
The UN says 83,695 people have now been displaced in Gaza and have taken refuge in 61 shelters and that the figure is "rising all the time".
Witnesses spoke of bodies lying in the street.
A humanitarian truce was agreed in the area, but lasted less than an hour with both sides blaming each other for violating the truce.
Paramedics said that rescue workers had not been able to get to the eastern part of Shejaiya, an area very close to the Israeli border and about three kilometres (1.2 miles) away from Gaza City, which has seen heavy shelling.
In an interview with BBC Arabic, Israeli Prime Minister Benjamin Netanyahu called Shejaiya a "terror stronghold" and a centre for rockets that are fired out to Israel.
Mr Netanyahu said Israeli troops had no choice but to enter densely populated areas and that they had asked civilians to leave.
The death toll in Gaza rose sharply over the weekend, with the number of Palestinians killed now standing at more than 425 since the operation began, according to Palestinian health officials.
They say the number of wounded from the operation now stands at more than 3,000.
The majority of those killed are civilians, the UN says.
In other developments:
- President Barack Obama has raised "serious concerns about the growing number of casualties" in the Gaza conflict, during a phone call with Mr Netanyahu
- UN Secretary General Ban Ki-Moon, in Doha for talks, said Gaza was "an open wound and we must stop the bleeding now"
- The Israeli military said it "neutralised" two militants who "emerged from a tunnel" in southern Gaza, with no harm to Israeli troops
- Israel says 70 rockets were fired from Gaza into Israel, with an additional 16 intercepted by the Iron Dome. No casualties have been reported.
Source: BBC News
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