Chief of Staff Lit.-Gen. Dan Halutz ordered a halt to artillery fire into the Gaza Strip until the conclusion of the probe, after consultations with Defense Minister Amir Peretz.
Peretz said the reluctance of terror cells to continue firing Qassam rockets into Israel led to the latest escalation, but expressed his deepest regrets for the incident.
"Qassam cells are the main reason for the escalation and the firing of artillery cells into Gaza. Israel has no intention of fighting the Palestinian people but of fighting terror and it will continue to do just that," Peretz said.
The IDF issued an apologetic statement in regretted the killing of innocent Palestinian civilians and offered to transfer the injured to Israeli hospitals.
An initial investigation ruled out earlier reports that the shells were fired from a navy ship and raised suspicions that the fire came from artillery batteries positioned near Beit Lahiya in northern Gaza to target Qassam launch pads.
A senior IDF officer said: "We make an extra effort not to hurt innocent civilians who are not involved in terror, including the cancellation of targeted assassinations if they endanger civilians."
Navy officer Colonel Yoram Lax said an initial investigation confirmed that shells fired by navy ships exploded far from the beach.
The air force said all air strikes are video recorded and target terror cells involved in firing rockets into Israel.
The IDF is checking whether an error occurred in one of the batteries leading to the shells going off-target.
"Artillery fire is very accurate. It is not roulette. The batteries fired over 6,000 shells over the last two months and there were very few deviations. A critical deviation like today's is unusual, but it is our duty to investigate thoroughly," an officer explained.