The move comes despite Spanish prosecution efforts to stop the case. Prosecutors submitted documents to the court, arguing that Israeli authorities already have investigated the incident.
But Judge Fernando Andreu, the investigating magistrate who is handling the case at Spain's National Court, disagreed.
Andreu wrote that despite the Israeli investigations, "Israel judicial authorities have not begun any criminal proceeding to determine if the events could lead to some type of penal responsibility," the court order said.
"Evidence of that is that the plaintiffs, victims of this 'preventative attack,' felt obliged to come before Spanish justice to begin a judicial investigation," the court order said.
The case was brought to the Spanish court by Palestinian relatives of some of the deceased. It names former Israeli Defense Minister Benjamin Ben-Eliezer and six other Israeli top military commanders and security officials at the time.
Ben-Eliezer last January, after the Spanish court initially accepted the case, lambasted the court, claiming the Spanish law is siding with terrorist organizations.
"This is a ridiculous decision and, even more than ridiculous, it is outrageous," Ben-Eliezer said in late January. "Terror organizations are using the courts in the free world, the methods of democratic countries, to file suit against a country that is operating against terror."
The National Court earlier said it had jurisdiction to investigate the case, arguing that if a potential human-rights crime is not being investigated by the country in question, Spain can proceed, under international law.
But prosecutors then had a chance submit arguments about the case. The judge's order on Monday to proceed despite prosecution opposition is not the first time a human rights case at the Spanish court has gone ahead in such circumstances.
The Israeli case involves the July 22, 2002 bombing in Gaza of the home of a suspected Hamas commander, Salah Shehadeh. The blast killed him and members of a Palestinian family named Mattar. They lived next door. Some of their relatives brought the suit to the Spanish court last August.