Swaddled in a flag, a dead child is held aloft on another bloody day in Gaza

We found them in the morgue, the victims of Israel's air strike on Gaza, tiny bodies lying on slabs that were too big for them. The Palestinians opened the refrigerators to show us the bodies. In refrigerator after refrigerator, there were the bodies of children.

They pulled back the covers over one to show the tiny head of a baby, eyes screwed up as if in sleep. Part of the back of its head was missing.

In the next refrigerator lay Mohammed al-Hwiti. They said he was four and a half years old. He too could have been asleep. He was still dressed in a bright blue top. "My friend" was written across it in English. In the refrigerator below they showed us his brother, Subhi. He was three and a half.

Nine children died when an Israeli missile smashed into the densely packed residential district at about midnight.

On the floor of the morgue, wrapped in a Palestinian flag, lay the target of the missile, Sheikh Salah Shehada. The morgue staff pulled back the flag. Inside were fragments of flesh. The body had been torn apart by the missile. In a second flag beside him lay a bundle of the body parts of his wife, Leileh, and their 14-year-old daughter.

Shehada was a man with the blood of children as young as these on his hands. He was the head of the military wing of Hamas, the militant group that has been behind more suicide attacks than any other, many of them against Israeli civilians.

Israel's Prime Minister, Ariel Sharon, described the air strike that killed him as "one of our biggest successes" because it "hit perhaps the most senior Hamas figure on the operational side". It was an unavoidable step to protect its citizens from suicide bombers, Israel said.

More than 140 people were wounded, and at least 14 died. All but Shehada and one other were civilians, we were told. "Are these terrorists?" one of the morgue staff asked angrily, pointing to the bodies of the children.

The White House, using unusually blunt language, said: "This heavy-handed action does not contribute to peace." Mary Robinson, the UN High Commissioner for Human Rights, said: "The reckless killing of civilians is absolutely prohibited, regardless of the military significance of the target being attacked." Britain also joined the condemnation, telling Israel's ambassador the strike was "unjustified and disproportionate".

Pushing our way out of the morgue to get back to clean air, we had to struggle through a crowd that was getting angrier by the minute. Thousands were congregating outside the morgue.

Hundreds of young men, their faces hidden under black hoods, fired guns in the air. "Are you prepared for revenge?" someone screamed through a loudspeaker. They roared back in answer and the air was thick with the sound of gunfire. They formed a funeral procession. Thousands kept coming in a great sea of people. They brought the bodies out, and a young man held the body of a baby aloft, swaddled in a Palestinian flag and keffiyeh head-dress.

We found the father of the two dead brothers in the refrigerators, Mahmoud al-Hwiti, in the hospital. His face was badly injured, he found it hard to speak. His brother, Mohammed, told his story. Not only were two of Mahmoud's sons killed, but his wife as well.

The two brothers, Mohammed and Mahmoud lived with their families in houses next door to each other. When we went to find the building, it was just a pile of rubble. The houses all around where the missile struck had been flattened, reduced to piles of dust and stones with metal rods twisting out of them at crazy angles.

Just before midnight on Monday this was a packed residential neighbourhood, full of people trying to sleep in the summer heat. Gaza City is teeming with Palestinians who have nowhere else to go. Residents said there were 20 people living in each house here.

The Israelis will say that Shehada deliberately targeted Israeli civilians, that their strike was directed against a militant with blood on his hands. But there was no way you could fire a missile into this warren of houses without inflicting terrible civilian casualties. They must have known that.

Across the walls of the half-ruined buildings next to those that were destroyed, someone had written in English: "This is the American weapon. This is the Israeli peace."

Mohammed said: "We had no idea we lived next to a guy from Hamas." It seems Shehada, who knew he was at the top of Israel's hit list, was living here in secret. None of his neighbours knew that in the house next door lived a man whose presence would bring death to them out of the sky. Residents said they had seen two Israeli F-16s circling earlier in the day, but that is not so rare an occurrence here, and nobody expected what happened next.

"At around midnight I was sleeping," said Mohammed. "I woke up to the noise of the bomb falling. Then I was scrabbling in the rubble for my three young children, and calling out to my older kids in the next room. My 16-year-old son said he was OK."

The deaths of civilians, so many of them children, has unleashed a terrible wave of anger here. Tens of thousands joined the funeral march through the streets, many of them firing guns as they went. The din was deafening. They draped the coffin of Shahadah under a green Hamas banner and paraded him slowly.

The strike came only hours after the spiritual leader of Hamas, Sheikh Ahmed Yassin, said the group was prepared to stop suicide attacks if Israel withdrew from the West Bank towns it had reoccupied, and the Israeli Foreign Minister, Shimon Peres, said Israel might be ready to pull out of two West Bank towns. Yesterday, all talk of moves towards peace was over. The talk was only of blood.