The fighting erupted at dawn at Nahr al-Bared camp near the northern port of Tripoli, Lebanon's second largest city. The army is attacking Fatah al-Islam, a small al Qaeda-inspired Sunni group that made its base in the camp last year.
It has little Lebanese or Palestinian support, but the bombardment of the crowded camp has begun to provoke anger among refugees elsewhere in Lebanon.
Residents of Nahr al-Bared appealed for fighting to stop, saying there were dead and wounded lying on the streets.
''We have seen many wars but never seen bombardment in this way.
Entire areas have been destroyed,'' Jamal Laila, 40, told Reuters by telephone. ''Children have no milk, water or bread.
''For the sake of 10, 20 or 30 individuals an entire camp is being massacred,'' he said, weeping over the phone.
Speaking from the same number, Aisha Laila, 40, said her five-month-old child had no milk and her three other children were crouched in a corner while bombs hit nearby houses.
''Perhaps those Fatah al-Islam are here. But we don't know them and don't know where they are. Why are we being bombarded?'' A UN aid convoy waited on the outskirts of the camp, but could not enter while the violence continued.
At least 22 militants, 32 soldiers and 27 civilians have been killed since the army and Fatah al-Islam began fighting on Sunday, making it Lebanon's worst internal violence since the 1975-1990 civil war. Fifty-five soldiers have also been wounded.
In Beirut, a bomb exploded in a shopping area in a mainly Sunni Muslim area on Monday night, wounding at least seven people. It appeared to mirror a blast on Sunday that killed a woman and wounded 10 people in a mainly Christian district.
A faxed statement in the name of Fatah al-Islam claimed responsibility for the blasts and threatened more. But Abu Salim, a spokesman for the group, denied it was involved.
PALESTINIAN PROTESTS Crowds gathered at the Palestinian refugee camp of Beddawi, 9 km from Nahr al-Bared, demanding a ceasefire and shouting slogans against the Lebanese army and government.
Hazma Qassem, a mosque imam in Beddawi, said people had at first opposed the militants who had attacked Lebanese troops.
''But we are now against the army after the scorched-earth policies it has been using and the massacres against women and children,'' he said. ''The battle will be open on all the Lebanese lands if there is not an immediate ceasefire.'' In Ain al-Hilweh camp in southern Lebanon, Islamist militants blocked roads with tyres and several shops closed. ''If the fighting (in the north) doesn't stop, the war will be with all Islam not just Fatah al-Islam,'' one militant said.
The renewed shelling began hours after Prime Minister Fouad Siniora's government stressed the need to root out Fatah al-Islam, which it sees as a tool of Syria.
''We are going to continue fighting until the last shot. There will not be another Jenin massacre,'' Abu Salim, the group's spokesman said, referring to an Israeli assault on a refugee camp in the West Bank in 2002.
Palestinian leaders met Siniora to discuss the crisis.
''We have agreed on measures to tackle and contain the situation,'' PLO representative Abbas Zaki said afterwards.
''Work is continuing to find common measures to prevent the country and camps from unacceptable escalations,'' he said.
The United States, which backs the Beirut government, said Lebanon was justified in attacking the militants.
''Extremists that are trying to topple that young democracy need to be reined in,'' U.S. President George W Bush said.
He stopped short of holding Damascus directly responsible, while saying that Syria was still involved in Lebanon.
Syrian Foreign Minister Walid Moualem again said his country opposed Fatah al-Islam and wanted to arrest its leaders. ''Our forces have been after them, even through Interpol,'' he said.
The violence has challenged Lebanon's army, which normally stays out of domestic conflicts and has shaken the government, seen as illegitimate by pro-Syrian and other opposition groups.
REUTERS DS BD1520