Israeli tank shellfire has killed at least 51 Palestinians in Khan Younis, according to the Hamas-run health ministry in Gaza.
Hundreds of others have been injured, with "dozens of critical cases" arriving at a medical complex.
It is feared that the number of people killed will rise.
The Israel Defence Forces said it was "aware of reports regarding a number of injured individuals from IDF fire following the crowd's approach" - and said details of the incident were under review.
It added: "The IDF regrets any harm to uninvolved individuals and operates to minimise harm as much as possible to them while maintaining the safety of our troops."
The statement claimed that a gathering had been identified near an aid distribution truck that was stuck in the area - near where IDF soldiers were operating.
The incident took place as people waited for United Nations and commercial aid trucks in the southern Gaza city.
Witnesses said Israeli forces carried out an airstrike on a nearby home before firing at least two shells toward the crowd.
One likened the incident to "a massacre", while another said it was a miracle he survived.
Thanos Gargavanis, a trauma surgeon and emergency officer at the World Health Organisation, said: "There's a constant correlation with the positions of the four announced food distribution sites and the mass casualty incidents."
Gaza's health ministry says "emergency, intensive care and operating rooms are experiencing severe overcrowding".
Some of those injured needed to be placed on the floors and corridors of Nasser Hospital because of a lack of space.
Officials say medical staff "are operating with limited supplies of life-saving medicines" - with the ministry renewing an "urgent appeal" to increase aid.
Samaher Meqdad - who was looking for her two brothers and nephew at the hospital - said: "We don't want flour. We don't want food. We don't want anything.
"Why did they fire at the young people? Why? Aren't we human beings?"
Hours earlier, Donald Trump had joined other G7 leaders to call for a "de-escalation of hostilities in the Middle East, including a ceasefire in Gaza".
Read more from Sky News:
How the Israeli-backed aid plan in Gaza is unravelling
Controversial aid distributor accuses Hamas of deadly attack
On Monday, Gaza's health ministry said at least 34 people were shot dead near food distribution centres.
This was the highest reported daily total since Israel and US-backed aid centres opened last month, with thousands of Palestinians moving through Israeli military-controlled areas to reach them.
The Israeli military previously acknowledged firing warning shots at people it said had suspiciously approached its forces near the aid sites.
According to the Gaza Humanitarian Foundation - which operates these aid centres - more than three million meals have been distributed without incident.
(c) Sky News 2025: Israeli tanks kill 51 people waiting for aid in Gaza, Hamas-run health ministry says
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