Judge Fernando Andreu of Spain's National Court started to investigate Israeli brutal attacks.
Wolrd Human Rights group hailed it as a great action.
Andreu first agreed to open the case in January at the request of Palestinian relatives of victims of the attack. Nine children were among the dead.
Andreu said he was acting under Spain's observance of the principle of universal jurisdiction, which holds that grave crimes such as genocide, terrorism or torture can be prosecuted here even if alleged to have been committed elsewhere.
Andreu said the 2002 bombing in densely populated Gaza City might constitute a crime against humanity. That attack with a one-ton bomb dropped from an Israeli F-16 targeted and killed many innocent people. Israel has defended the attack as a legitimate strike against a terrorist.
On Monday, the Spanish judge wrote that Israel's military conducted an internal investigation but Israeli military and civilian prosecutors declined to open proceedings of their own. He said for this reason Spain has jurisdiction to keep investigating.
"In Israel there has not been, nor is there now under way, any legal proceedings aimed at investigating" the Gaza bombing, the judge wrote.
Andreu's initial decision to investigate infuriated the Israeli government.
Last week another Spanish judge, Baltasar Garzon, announced an investigation into alleged torture of terror suspects at the U.S. prison in Guantanamo Bay.
Raji Sourani, director of the Palestinian Center for Human Rights, located in the Gaza Strip, said, "We welcome this decision as the first step toward justice for the survivors of a massive extra-judicial execution operation perpetrated by the Israeli Occupation Forces ... This is a great victory."
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