A pipe bomb believed to have been planted by Palestinian militants exploded on board a bus moments after passengers had left, in the most serious attack inside Israel in more than a year.
The explosion threatens to further poison what has become a tense and negative atmosphere at sensitive Middle East peace efforts. Israel and the Palestinians resumed talks last summer for the first time in nearly five years, and the US-brokered negotiations have made little visible progress.
Police spokesman Micky Rosenfeld said there were no injuries in yesterday's blast in the Tel Aviv suburb of Bat Yam, which blew out the bus' windows and charred the sides of the vehicle.
"Based on the findings at the scene by bomb disposal experts, it was a terrorist attack," Mr Rosenfeld said. "We're continuing to search the area for suspects."
He said the nature of the target and device pointed towards militants being behind the bombing. There was no immediate claim of responsibility.
The bomb was discovered in a bag by a passenger on the bus and the driver quickly ordered passengers to leave. The device exploded shortly afterwards as a bomb squad expert was inspecting it. The police sapper was not injured but was taken to a hospital for examination.
President Shimon Peres later phoned and thanked the bus driver and the passenger who discovered the explosive, saying their actions saved lives.
"The nation owes you a debt of gratitude and I would like to personally congratulate you for this act of bravery," he told driver Michael Yoger.
US State Department spokesman Jen Psaki said: "Violent acts targeting civilians are deplorable. We reaffirm our unshakable bond with Israel and our solidarity with the Israeli people."
It was the most serious attack inside Israel since a bomb explosion wounded more than 20 people in Tel Aviv last November, when Israel was involved in heavy fighting with Palestinian militants in the Gaza Strip.
A decade ago Israel experienced a rash of Palestinian suicide bombings on buses, in restaurants and in other public spaces. More than 3,000 Palestinians and 1,000 Israelis died in several years of fighting.
Tensions have subsided in recent years but the neighbouring West Bank has seen a recent increase in Israeli-Palestinian violence.