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Video footage showed bodies being carried from burning tents after the overnight bombing that left dozens wounded, mostly women and children, as they slept.
People could be seen trying to put out flames with water and extinguishers as fire engines arrived at the site designated for people who have been displaced
This morning they were pictured searching the smoldering remains.
The Israel Defense Forces (IDF) said it had targeted two senior Hamas leaders at one of the group’s compounds and would review reports fire had spread to shelters, harming civilians.
The strike came hours after Hamas fired eight rockets from Rafah towards Tel Aviv, the first long-range attacks on the city since January.
In a statement released after the blast inside Gaza on Sunday night, the IDF said it had “eliminated” two senior Hamas figures – Yassin Rabia and Khaled Nagar – in a “precise” air strike “in north-west Rafah”.
The IDF said it had targeted Hamas militants with precision weapons.
Hamas-run authorities said 35 people had been killed and dozens injured at a camp for displaced Palestinians north-west of Rafah, away from recent military operations in a designated humanitarian safe zone.
It said women and children are among the dead.
The death toll was likely to rise as search and rescue efforts continued in Rafah’s Tal al-Sultan neighbourhood about 2 km (1.2 miles) north-west of the city centre, a Palestinian Red Crescent Society spokesperson quoted by the Associated Press news agency said.
An eyewitness told Reuters news agency the whole neighbourhood in Tal Al-Sultan had been “burnt”.
Another witness, Fadi Dukhan, described sitting at the door of a house when he heard an explosion.
“Suddenly we heard the sound of a missile,” he told Reuters. “We ran and found the street covered in smoke. We did not see anything.”
Entering a house, he added, he did not find anyone inside but later found “a girl and a young man who had been cut into pieces”.
Getty ImagesEarlier on Sunday air raid sirens sounded around Tel Aviv as central Israel came under attack by Hamas rockets, fired from close to Rafah.
The eight rockets were either intercepted by air defence systems or fell in fields.
Israel’s military offensive has continued in Rafah, despite the International Court of Justice ruling on Friday that it must halt.
The rocket barrage highlights the threat Hamas still poses to people across Israel, although there were no reports of injuries.
It also illustrates the challenges the Israeli army faces as it moves further into southern Gaza to oust Hamas from what it calls its “last major stronghold”.
The military wing of Hamas said it had acted in response to “the massacre of civilians”.
The rocket attack came ahead of further ceasefire negotiations between Israel and Hamas, which are expected to resume next week.
Israel began a long-anticipated offensive in Rafah about three weeks ago, vowing to destroy the remaining Hamas battalions there.
It believes Israeli hostages are also being held in the town.
More than 800,000 Palestinians have fled from Rafah since the offensive began, according to the UN.
About 1.5 million people had been sheltering there from the fighting elsewhere in Gaza.
Israel’s military campaign in Gaza began after Hamas-led gunmen attacked Israel on 7 October, killing about 1,200 people and taking 252 others back to Gaza as hostages.
Nearly 36,000 Palestinians have been killed in the war since then, according to Gaza’s Hamas-run health ministry.