* Thousands flee Israeli shelling of Gaza neighbourhood
* Israel says half of Hamas's rockets used or destroyed
* U.N.'s Ban to see Abbas in Qatar, tour region in truce bid
By Nidal al-Mughrabi and Jeffrey Heller
GAZA/JERUSALEM, July 20 (Reuters) - At least 50 Palestinians were killed on Sunday by Israeli shelling in a Gaza neighbourhood, where bodies were strewn in the street and thousands fled for shelter to a hospital packed with wounded, witnesses and health officials said.
As the number of dead mounted, Israel and Gaza's dominant Hamas movement agreed to a two-hour "humanitarian truce" in that area, from 1:30 p.m. to 3:30 p.m. (1030 GMT to 1230 GMT), at the request of the Red Cross. Fighting continued elsewhere in Gaza.
The mass casualties in Shejaia, in northeast Gaza, were the heaviest since Israel launched its offensive on the Palestinian territory on July 8 after cross-border rocket strikes by militants intensified.
Palestinian President Mahmoud Abbas, who is based in the occupied West Bank, accused Israel of carrying out a massacre and declared three days of mourning.
The Israeli military said on Sunday Hamas had deployed rockets and built tunnels and command centres in Shejaia.
"Two days ago, residents of Shejaia received recorded messages to evacuate the area in order to protect their lives," an Israeli military spokeswoman said.
Anguished cries of "Did you see Ahmed?" "Did you see my wife?" echoed through the courtyard of Gaza's Shifa hospital, a where panicked residents of Shejaia gathered in family groups, seeking a safe haven. Inside, bodies and wounded lay on blood-stained floors.
Elderly men there said the Israeli attack was the fiercest they had seen since the 1967 Middle East war, when Israel captured Gaza.
Shifa hospital's director, Naser Tattar, said 17 children, 14 women and four elderly were among the 50 dead, and about 400 people were wounded in the Israeli assault.
Gaza's Health Ministry officials said at least 385 Palestinians, many of them civilians, have been killed in the 13-day conflict and about 2,600 have been wounded.
On Israel's side, two civilians have been killed by cross-border fire and five soldiers have died in fighting. More than 50 Israeli troops have been wounded, hospital officials said.
Thousands fled Shejaia, some by foot and others piling into the backs of trucks and sitting on the hoods of cars filled with families trying to get away. Several people rode out of the neighbourhood of 100,000 in the shovel of a bulldozer.
Video given to Reuters by a local showed at least a dozen corpses, including three children, lying in rubble-filled streets, though the footage could not be verified independently.
There were no signs of a breakthrough on diplomatic efforts to get a permanent ceasefire, and militants kept up their rocket fire on Israel. Sirens sounded in southern Israeli towns and in the Tel Aviv metropolitan area. There were no reports of casualties on the Israeli side.
Hamas had urged people across the territory not to heed the Israeli warnings and abandon their homes.
As the tank shells began to land, Shejaia residents called radio stations pleading for evacuation. An air strike on the Shejaia home of Khalil al-Hayya, a senior Hamas official, killed his son, daughter-in-law and two grandchildren, hospital officials said.
Israel, which has accused Hamas of using civilians as human shields by launching rockets from residential areas, sent ground forces into the Gaza Strip on Thursday after 10 days of air, naval and artillery barrages failed to stop the salvoes.
The military said it beefed up its presence on Sunday, with a focus on destroying missile stockpiles and a vast tunnel system Hamas built along the frontier that crosses into Israel.
"It has been a tough day of combat, but it won't deter us," Israeli Finance Minister Yair Lapid said, without referring to events in Shejaia.
"The operation is necessary and, if needed, we will broaden it," he told reporters while visiting wounded Israeli soldiers in a hospital in the southern city of Beersheba.
Egypt, Qatar, France and the United Nations, among others, have all been pushing for a diplomatic solution, with little sign of progress.
Qatar was due to host a meeting between Abbas and U.N. Secretary-General Ban Ki-moon on Sunday, a senior Qatari source told Reuters. Ban was due to travel to Kuwait, Egypt, Israel, the Palestinian Territories and Jordan during the week, a U.N. statement said.
The Qatari source said Abbas would also meet Hamas leader Khaled Meshaal.
Western-backed Abbas in April struck a deal with Islamist Hamas that led to the formation of a Palestinian unity government and Israel's pullout from U.S.-brokered peace talks.
Hamas has already rejected one Egyptian-brokered truce, saying any deal must include an end to a blockade of the coastal area and a recommitment to a ceasefire reached after an eight-day war in Gaza in 2012.
Egypt said on Saturday it had no plans to revise its ceasefire proposal. A Hamas source in Doha said the group has no plans to change its conditions for a ceasefire.
Hostilities escalated following the killing last month of three Jewish students that Israel blames on Hamas. Hamas neither confirmed nor denied involvement.
The apparent revenge murder of a Palestinian youth in Jerusalem, for which Israel has charged three Israelis, further fuelled tension.
The Israeli death toll has been kept low due to the rockets' relative inaccuracy, a network of air-raid sirens and shelters and the Iron Dome rocket interceptor's 90 percent success rate. (Additional reporting by Noah Browing in Gaza and Ari Rabinovitch in Jerusalem; Writing by Jeffrey Heller; Editing by Andrew Heavens)