About 500 people including patients were huddled in a Gaza City hospital that suffered a "direct hit" in an Israeli air strike Thursday, the international Red Cross said, condemning the incident as unacceptable.

In an unusually sharply-worded statement, the International Federation of Red Cross and Red Crescent Societies said that the situation in Gaza was "completely and utterly unacceptable based on every known standard of international law and universal humanitarian principles and values."

The second floor of the Al-Quds hospital immediately caught fire in the strike on Thursday morning, severely damaging the pharmacy and parts of the building.

The blaze was put out by fire engines that rushed to the scene escorted by the Red Cross.

However, 500 people were still inside by mid-afternoon, "huddled on the ground floor ... in fear for their lives and choking on dust and fumes," according to the Federation.

A French doctor in Gaza earlier said staff and patients were trapped by Israeli attacks in the neighbourhood.

Meanwhile, at least one Palestinian Red Crescent warehouse with relief supplies was shelled by Israeli forces on Thursday morning and set ablaze.

The Federation accused Israeli soldiers of firing on Red Crescent volunteers to stop them from putting out the fire.

The Federation's sister agency, the International Committee of the Red Cross (ICRC) said earlier that the attack on the hospital had put the lives of 100 patients and medical staff "at risk."

"The hospital suffered at least one direct hit this morning, and all the patients had to be moved in panic to the ground floor," Bashar Morad, director of Palestine Red Crescent emergency medical services added.

The incident was condemned by the ICRC President Jakob Kellenberger, who was wrapping up a three-day visit to the Occupied Territories, including another hospital in the Gaza Strip, and to Israel.

"It is unacceptable that wounded people receiving treatment in hospitals are put at risk," said Kellenberger.

"These recent developments are particularly alarming in that the Gaza hospitals are already overcrowded and overstretched, and the number of casualties is growing."

He had received commitments from Israeli Foreign Minister Tzipi Livni and Defence Minister Ehud Barak that everything possible will be done to facilitate the agency's humanitarian work on the ground after meeting early on Thursday. But the Federation deplored that humanitarian aid was not being eased through and warned that thousands of people were in need of medical attention that was "impossible to deliver" because of the conflict.