The assault began at around 8pm on Sunday, with gunshots reported up to four hours later.
Cafes and bars were reported to have been busy with people watching the World Cup on television.
District deputy commissioner Benson Maisori said: "There were around 50 attackers, heavily armed in three vehicles, and they were flying the Shabaab flag.
"They were shouting in Somali and shouting 'Allahu Akbar' (God is Greatest)."
Area police chief Hamaton Mwaliko said: "Attackers hijacked a van from Witu town which they used for the attacks. They raided Mpeketoni police station first and opened fire."
The Red Cross said 48 people had been killed.
Kenyan army spokesman Major Emmanuel Chirchir said the "assailants (were) likely to be al Shabaab", Somalia's al Qaeda-linked insurgents.
However, no group has claimed responsibility.
Kenya has seen a drop in tourists in recent months following a string of gun and grenade attacks blamed on al Shabaab, Somalia's al Qaeda-linked insurgents, or its sympathisers.
Mpeketoni lies on the mainland some 20 miles (30km) southwest of Lamu island, a popular tourist destination and UNESCO World Heritage site.
Al Shabaab, which has fought a bloody seven-year campaign to impose its interpretation of Islamic law inside Somalia, has said it wants to take revenge for Kenya's deployment of troops in the Horn of Africa nation.
Kenya is suppose to be one of the most popular attraction for Africa, such a big shame that tourist have been dissuaded from going their. These cannibals just have to stop.
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