The military wing of the Palestinian militant group Hamas has said it will no longer respect a self-imposed truce.
The shelling has caused outrage among Palestinians
In a statement on its website, the Izzedine al-Qassam Brigade said Israeli "massacres" had spurred the decision.
Seven people, including three children, died on Friday when Israeli shells hit a beach in the Gaza Strip, Palestinian officials say.
Hamas government spokesman Ghazi Hamad told the BBC that Israel's attacks justified the move to end the truce.
"No-one can say to our people you have to be patient, you have to be polite," he said.
"It is our right to fight the occupation, it is our right to defend ourselves, it is our right to protect our people."
The Palestinian Authority President Mahmoud Abbas declared three days of mourning following the bombing.
Hamas's armed wing posted a message on its website and distributed leaflets declaring the end of a ceasefire that had held since February 2005.
"The Israeli massacres represent a direct opening battle and that means the earthquake in the Zionist cities will resume and the herds of occupiers have no choice but to prepare the coffins or the departing luggage," the statement read.
The BBC's Simon Wilson in Jerusalem says there have been similar threats to respond to previous attacks, but the official nature of this response appears significant.
The statement came hours after the seven reported deaths on a beach near the northern Gaza town of Beit Lahiya. At least 30 people were wounded.
Eyewitness Sami Yousef told the BBC News website people lying on the ground badly injured, crying.
"There were remains scattered along the beach. Three children were there, two with severe deep cuts in their heads," he said.
"One girl was just screaming, crying out for her father."
TV pictures suggest a family was on a picnic when the disaster struck
The BBC's Alan Johnston in Gaza says it looks very much as if this was a family enjoying their Friday afternoon off on the beach when disaster struck.
For many months, the Israelis have regularly shelled open areas such as fields and orchards in an effort to prevent Palestinian militants using them to fire their crudely made missiles into nearby Israeli territory.
An Israeli army spokesman said chief of staff Dan Halutz had ordered an immediate stop to all artillery shelling of Gaza while an investigation was carried out into the incident.
Four other people were also killed in separate Israeli air strikes in northern Gaza on Friday, Palestinians said.
And on Thursday, a senior Palestinian security official close to the Hamas government, Jamal Abu Samhadana, was killed in an Israeli air strike, sparking angry demonstrations in Rafah, southern Gaza.
Speaking before the Hamas statement, Mr Abbas condemned the Israeli strikes in Gaza.
"What the Israeli occupation forces are doing in the Gaza Strip constitutes a war of extermination and bloody massacres against our people," he said.
UN Secretary General Kofi Annan said he was "deeply disturbed" by the killings and called for a full investigation.
The foreign ministers of Russia and the UK also condemned the strike.