The deadly incident came after the Israeli army said it had encircled the city, where footage released by the military showed soldiers engaged in urban combat amid ruined buildings.
Hamas's press office also reported fierce clashes in the centre and west of Khan Younis, while its health ministry counted multiple deaths overnight from strikes in the city and elsewhere in the territory.
It said four children were killed in the Nuseirat camp in an early morning bombardment on Thursday.
Wednesday's attack on UN shelter for displaced people saw the site hit by two tank rounds, killing 12 and injuring 75, said Thomas White, the Gaza head of the UN agency for Palestinian refugees, UNRWA.
Palestinian medics said Israeli tanks had cut off and were shelling targets around the city's two main still-functioning hospitals, Nasser and Al-Amal, trapping medical teams, patients and displaced people sheltering inside or nearby.
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