At least 27 people were injured in the blast when a bus blew up, the first bombing in Tel Aviv since 2006. It appeared aimed at sparking Israeli fears of a return to the violence of the Palestinian uprising of the last decade, which killed more than 1,000 in bombings and shooting attacks and also left more than 5,000 Palestinians dead.
While Hamas did not take responsibility for the attack, it praised the bombing. "We consider it a natural response to the occupation crimes and the ongoing massacres against civilians in the Gaza Strip," a spokesman said.
Just hours before the bombing US Secretary of State Hillary Clinton, shuttling across the region in truce talks, arrived in Cairo and met Egyptian President Mohammed Morsi, mediating between Israel and Hamas to end the fighting that has killed more than 140 Palestinians and five Israelis.
The Tel Aviv attack came after a night of more than 30 Israeli airstrikes over Gaza that hit government ministries, smuggling tunnels, a banker's empty villa and a Hamas-linked media office. Around 10,000 Palestinians sought shelter in 12 UN-run schools, after Israel dropped leaflets urging them to vacate their homes in some areas of Gaza to avoid being hit by airstrikes.
The bus attack took place around noon on one of the coastal city's busiest arteries, near the Tel Aviv museum, the district courthouse and across from an entrance to Israel's national defense headquarters.
The blast was from a device placed inside the bus by a man who then got off, said Yitzhak Aharonovich, Israel's minister of internal security, He said the explosion took place while the bus was moving. In Gaza, the bombing was praised from mosque loudspeakers, while Hamas' television station interviewed people praising the attack as a return of militants' trademark tactics.
Israel and Hamas had seemed on the brink of a truce deal following a swirl of diplomatic activity also involving UN chief Ban Ki-moon and Mr Morsi. But sticking points could not be resolved as talks - and violence - stretched into the night.
Israeli Defence Minister Ehud Barak said Israel wanted a truce to start with a 24-hour test period of no rocket fire to see if Hamas could enforce a truce among its forces and other Gaza militant groups.
Palestinian officials briefed on the negotiations said Hamas wanted assurances of a comprehensive deal that included new arrangements for prying open Gaza's heavily restricted borders - and were resisting Israeli proposals for a phased agreement. Israel and Egypt shut the border after the militant group seized the territory from Abbas in June 2007, hoping to disrupt Hamas rule.